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Moody’s Assesses Risks Associated with Otkritie FC Bank’s Rapid Asset Growth as Moderate

08.07.2016

Moody's has published a report answering the questions most frequently asked by investors about Otkritie FC Bank’s development strategy when it comes to the bank’s rapid asset growth in 2014-15, which was primarily driven by the reverse repurchase of bonds of a large Russian corporate and of Russia-30 Eurobonds. The report also states that the financial rehabilitation of Trust Bank led by Otkritie Holding has virtually no impact on Otkritie FC Bank’s credit profile.

According to Moody's, concentration risks on the asset side of the balance sheet and refinancing risk in liabilities are balanced by the high quality of the acquired exposures and sizeable revenues from the reverse repos, which contributed up to RUB 25.1 billion in 2015.

The agency’s analysts also note that “refinancing risks under the bank's well-structured reverse repo transactions are moderate”. In particular, the credit risk is mitigated by the presence of high-quality collateral, while market risk is offset by sufficient haircuts. The refinancing risk is mitigated by indirect government support of the reverse repo deals with the corporate borrower and the strategic importance of the latter for the Russian economy. Also, Otkritie FC Bank can afford to switch FX repo with the Central Bank of Russia to repo with local market participants due to the high quality of the collateral.

The agency also notes that, despite the rapid asset growth, Otkritie FC Bank has met all mandatory requirements imposed by the Central Bank of Russia in relation to the maximum risk exposure to single borrowers, groups of borrowers and in terms of the size of related party transactions.

One of the top questions asked by investors is whether there is any impact on Otkritie FC Bank’s credit profile from the financial rehabilitation of failed Trust Bank. According to Moody’s, the financial rehabilitation of Trust Bank led by Otkritie FC Bank has no direct or indirect material impact on Otkritie FC Bank’s credit profile. Trust Bank is placed outside the perimeter of Otkritie FC Bank group and is a relatively small entity in terms of its asset size (4.7% of Otkritie FC Bank and 4.1% of Otkritie Holding assets). The rehabilitation plan envisions a merger and integration of Trust Bank into the banking business of Otkritie Holding by the end of 2020. Moody’s does not expect a merger of Otkritie FC Bank and Trust Bank to take place until the latter’s balance sheet is cleaned up and its business model is restored, which will likely take several years.

“The report by Moody’s has demonstrated that our choice of strategy was right,” said Otkritie Holding CEO Ruben Aganbegyan. “We have created a well-balanced business model allowing us to maintain long-term profitability, despite the changing macroeconomic environment. In 2014, our main source of profit was lending. In 2015, as the situation in this sector changed, we switched to financial market transactions. It is important that whenever we find a new source of income we always thoroughly control all risks”.