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Credit Opinion: Alfa-Bank
Global Credit Research - 25 Mar 2015
Moscow, Russia
Ratings
Category
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit
Assessment
Senior Unsecured
Subordinate
Moody's Rating
Negative
Ba2/NP
ba3
ba3
Ba2
B1
Amsterdam Trade Bank N.V.
Outlook
Bank Deposits
Baseline Credit Assessment
Adjusted Baseline Credit
Assessment
Rating(s) Under
Review
*Ba3/NP
**ba3
**ba3
Alfa MTN Issuance Limited
Outlook
Bkd Sr Unsec MTN
Bkd Other Short Term
Negative
(P)Ba2
(P)NP
* Rating(s) within this class was/were placed on review on January 13, 2015
** Placed under review for possible downgrade on March 17, 2015
Contacts
Analyst
Irakli Pipia/London
Semyon Isakov/Moscow
Yves Lemay/London
Ilya Pestryakov/Moscow
Phone
44.20.7772.5454
7.495.228.6060
44.20.7772.5454
7.495.228.6060
Key Indicators
Alfa-Bank (Consolidated Financials)[1]
Total Assets (RUB billion)
Total Assets (USD billion)
Tangible Common Equity (RUB billion)
Tangible Common Equity (USD billion)
Problem Loans / Gross Loans (%)
Tangible Common Equity / Risk Weighted Assets (%)
Problem Loans / (Tangible Common Equity + Loan Loss
Reserve) (%)
Net Interest Margin (%)
PPI / Average RWA (%)
[2]6-14 [2]12-13 [2]12-12 [2]12-11 [2]12-10
1,696.5 1,598.5 1,403.1 1,007.5 869.3
49.8
48.6
45.9
31.4
28.5
170.1 152.3 120.1 106.0
87.4
5.0
4.6
3.9
3.3
2.9
4.5
3.5
2.3
5.0
7.5
12.0
11.5
10.1
11.6
12.1
23.6
19.3
14.1
24.9
32.3
4.7
4.3
4.8
4.4
5.8
3.7
4.6
5.2
5.3
7.3
Avg.
[3]18.2
[3]15.0
[3]18.1
[3]14.9
[4]4.6
[5]11.4
[4]22.8
[4]5.0
[5]5.0
Net Income / Tangible Assets (%)
Cost / Income Ratio (%)
Market Funds / Tangible Banking Assets (%)
Liquid Banking Assets / Tangible Banking Assets (%)
Gross Loans / Total Deposits (%)
Source: Moody's
1.0
41.9
27.0
26.2
125.6
1.9
43.8
29.5
29.6
108.5
1.8
46.4
26.3
29.9
104.4
2.1
51.6
24.8
26.3
116.7
2.0 [4]1.7
44.3 [4]45.6
23.1 [4]26.1
36.2 [4]29.6
100.0 [4]111.1
[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual
Growth Rate based on IFRS reporting periods [4] IFRS reporting periods have been used for average calculation
[5] Basel I & IFRS reporting periods have been used for average calculation
Opinion
SUMMARY RATING RATIONALE
Moody's assigns a standalone baseline credit assessment (BCA) of ba3 to Alfa-Bank's (Alfa). The rating is
supported by: 1) the bank's strong commercial franchise in Russia and business diversification; 2) strong
capitalisation and manageable, although deteriorating, level of non-performing assets.
The rating is constrained by: 1) high, albeit reducing, single-name concentrations on both sides of the balance
sheet; 2) a significant level of related-party exposures; 3) very challenging operating environment and volatility in
the macro fundamentals affecting the Russian economy and growth opportunities for the group.
Alfa's senior debt and deposit ratings at Ba2 are based on the bank's BCA of ba3 and Moody's assessment of a
low probability of systemic support for the bank in case of need. This results into one notch uplift on the bank's
standalone BCA.
We base our systemic support assumptions on a track-record of government support (subordinated loan was
granted by the government to Alfa in 2009 alongside with other large banks in Russia), and the bank's market
share of around 3% in retail deposits (term and demand) with almost 10.8 million retail clients. The latter makes
Alfa-Bank one of the largest deposit-takers in Russia.
THE BANK'S RATING IS CONSTRAINED BY RUSSIA'S MACRO PROFILE OF WEAK+
Russian banks face a very challenging operating environment and high likelihood of a sharp economic contraction
in 2015, that Moody's expect to extend into 2016, followed by a weak recovery. The country's susceptibility to
shocks or event risk is high, given geopolitical tensions in the region. The country's institutional strength is low,
reflecting Russia' weak levels of governance, rule of law and transparency.
Funding conditions remain difficult; access to international capital markets is restricted and the domestic cost of
funding has substantially increased, while recent volatility in the rouble exchange rate increases foreign-currency
mismatch risk. However, the system principally relies on domestic sources of funding, with the Central Bank of
Russia in particular acting as a major creditor to banks, funding more than 10% of the system's liabilities.
Credit conditions in Russia are influenced by rapid growth in the past, although growth rates have moderated since
mid-2013. We expect subdued loan growth in 2015 and into 2016 given the economic slow-down. Our assessment
also incorporates high levels of single-name borrower concentrations and the potential for rapid formation of new
nonperforming loans, as occurred during the 2008/09 crisis.
In terms of industry structure, Russia's banking industry is more concentrated than most other emerging-market
peers; the three largest government-owned banks together account for about 50% of total banking assets.
However, the rest of the system is competitive and there is no evidence of overcapacity in the industry.
Rating Drivers
- Established business franchise in corporate and retail banking, supported by a large branch network across
Russia
- The risk profile is negatively affected by single- and related-party concentrations, albeit declining, in loans and
deposits
- Manageable, albeit declining, asset quality trends and solid capitalisation
- Pressure on profitability balanced with good efficiency
- High loan-to-deposit ratios with manageable refinancing risk
Rating Outlook
In February 2015 Moody's downgraded the standalone and the long-term ratings of Alfa-Bank. The action on the
supported ratings follows the weakening of Russia's credit profile, as reflected by Moody's downgrade of Russia's
government debt rating to Ba1 from Baa3 on 20th of February, 2015 and placing it on a negative outlook. The
outlook on Alfa-Bank's supported ratings is negative in line with the outlook on the sovereign rating.
What Could Change the Rating - Up
Any positive developments would require one or more of the following: (i) the ongoing ability to maintain overall
profitability and capital buffer commensurate with risks assumed in the current deteriorating operating environment,
(ii) a marked improvement in its risk profile, reflected in decreased concentration levels in loans and related-party
exposures. The bank's long-term ratings are unlikely to come under upward pressure in the near term given its
current negative outlook.
What Could Change the Rating - Down
A larger than expected deterioration of asset quality, capitalisation and/or liquidity position (including refinancing
risk) could have a negative impact on the standalone credit profile, as could a weakening market position and a
material loss of market share.
Alfa-Bank's senior debt/deposit ratings could be downgraded in the event of a downgrade of the bank's BCA
and/or Moody's re-assessment of the current probability of systemic support.
DETAILED RATING CONSIDERATIONS
ESTABLISHED BUSINESS FRANCHISE IN CORPORATE AND RETAIL BANKING, SUPPORTED BY A
LARGE BRANCH NETWORK ACROSS RUSSIA
With total assets of $49.8 billion Alfa is Russia's largest privately owned banking group, with one of the largest
branch networks in the country. The bank has a clear corporate focus in assets, but is rapidly diversifying into
retail banking. In a market dominated by state banks, Alfa is the 5th largest banking group by system assets, with
around 3% market share in terms of assets. The bank serves a large number of customers in the range of around
10.8 million retail and over 128 thousand corporate clients as at June 2014.
The bank is controlled by Alfa Group Consortium (not rated by Moody's), one of the largest Russian
conglomerates that owns Rosvodokanal Group, large stakes in X5 Retail Group, among others assets. Alfa Group
Consortium appears to be cash-rich following the sale of its 25% stake in oil company TNK-BP to Rosneft for
around $14 billion. The group is beneficially owned by six shareholders, including Mikhail Fridman, German Khan
and Alexei Kuzmichev. The bank has diversified away from providing loans to Alfa Consortium companies over
recent years, although related-party transactions remain an important business for the bank, done on market
terms according to bank management and shareholders.
Alfa operates primarily in Russia through a large branch network. At June 2014, it distributed products and
services through a network comprising 672 offices (including branches, regional branches and outlets) (YE 2013:
617).
Alfa has a clear corporate focus in lending. Corporate loans accounted for 80% of gross loans at June 2014.
Based on Alfa's segment reporting under IFRS, the corporate segment (also includes investment banking)
generated US$162 million in pre-tax profit for the first half of 2014 (H1 2013: US$400 million ). This significant
decline compared with the previous year's result was mainly driven by an increase in higher provisioning charges
compared with the previous year.
Retail loans amounted to 20% of gross loans at June 2014, and were reasonably well diversified by products,
dominated by personal instalment loans and credit cards, consumer finance, and followed by mortgages, which
remain an underdeveloped asset class in Russia. The retail banking segment made a pre-tax profit of
US$115million for the first half of 2014 (H1 2013: US$150 million). Despite higher segment revenue in 2014, the
decline in the segment's overall profit was due to increase in provisioning (particularly in unsecured consumer
lending), as well as a general increase in operating expenses.
- THE RISK PROFILE IS NEGATIVELY AFFECTED BY SINGLE- AND RELATED-PARTY
CONCENTRATIONS IN LOANS AND DEPOSITS
The bank has a notable single-client concentrations on both sides of the balance sheet. Loans to the 20 largest
groups of corporate clients amounted to almost 200% of Tier 1 capital at June 2014, up from 187% at year-end
2013, but still lower than 244% at year-end 2012. These concentration metrics, although still high, are mostly in line
with the Russian system average. The largest credit exposures are to Alfa Group companies and Russian bluechip companies of comparable financial strength.
Alfa's credit exposure to related-parties has been volatile in recent years, but remains above the level seen at
similarly rated peers. Moody's traditionally considers related-party transactions as higher-risk because of the
potential conflict of interest between shareholders and creditors and reputational difficulties associated with the
recovery of such loans.
During H1 2014, Alfa has significantly increased its' related-party exposures (including corporate and bank loans,
securities and receivables) to around US$2 billion or 42% of Tier 1 capital, up from US$1.1 billion or 25% of Tier 1
capital at end-2013 (YE2012: 49%).
The bank also has large foreign currency exposures with 47% of assets and 42% of liabilities were denominated in
foreign currencies, mainly in US dollars, as at June 2014. Although the foreign currency exposures on the both
sides of the bank's balance sheet appear to be matched, we still note that some non-export oriented borrowers
could be exposed to a currency exchange risk, especially given the recent volatility in the exchange rate.
MANAGEABLE, ALBEIT DECLINING, ASSET QUALITY TRENDS AND ADEQUATE CAPITAL ADEQUACY
Alfa's asset quality deteriorated notably in light of the economic slowdown in 2014. Problem loans (including
impaired and loans overdue by more than 90 days) increased to US$1.6 billion or 4.5% of total gross loans at June
2014 from US$1.2 billion or 3.5% at YE2013 (2012: US$0.7 billion or 2.3%). Alfa's asset quality metrics remains
sound compared to Russian peers (5-10% problem loan ratios on average), which has been attributed to more
efficient problem loan workout procedures. Alfa's loan loss reserves ratio for gross loans increased slightly to 5%
of total gross loans at June 2014 from 4.3% at end- 2013. We note that although currently Alfa's provisioning level
creates an adequate buffer against problem exposures further deterioration in this ratio would be considered as
credit negative.
The industry breakdown of the loan book is relatively granular, dominated by trade & commerce (10%), machinery
and metal work (9%), finance and investment companies (8%), real estate (7%) of gross loans and other. The
share of construction made up 4% of gross loans at end-June 2014, which we view as conservative.
Despite an almost 5% increase in Tier 1 Capital since year-end, the bank's capital adequacy has deteriorated
slightly, mainly due to pressure from new lending growth and a slight reduction in Tier 2 capital. Total CAR (Basel
I) stood at 16.5% at June 2014 (2013: 16.7%), with Tier 1 at 11.8% (2013: 11.7%). The increase in nominal capital
was mainly supported by retained earnings. The quality of capital is somewhat impaired by related-party loans, as
discussed in the section above. Alfa's Tier 1 compares favourably with similarly-rated banks. Our base-case
scenario analysis on Alfa's risk absorption capacity indicates that the bank has a sufficient capital buffer against
potential credit and market losses.
PRESSURE ON PROFITABILITY BALANCED WITH GOOD EFFICIENCY
For the first six months of 2014, the bank reported a profit of US$237 millions, a 50% reduction compared with the
same period last year despite an increase in pre-provision earnings. The main reason of the reduction was an
almost a threefold increase in provisioning expenses. We expect Alfa-Bank's profitability metrics to continue to be
under pressure in 2014 due to more challenging operating conditions and a slowdown in economic growth in
Russia.
During the first half of 2014, the bank' maintained a relatively stable margin in the range of 4.8% which supported
its net interest income.
The bank's efficiency is one of the best among the peer group with cost-to-income ratio at 42% in H1 2014 (2013:
44%).
HIGH LOAN-TO-DEPOSIT RATIOS WITH MANAGEABLE REFINANCING RISK
We consider Alfa's liquidity management to be adequate. At June 2014, the bank had around US$4.3 billion in
cash and equivalents, or 9% of its total assets. An additional layer of liquidity was composed of relatively liquid
trading securities of around US$2.6 billion (of which 65% was pledged with the CBR and other banks under repo
agreements at June 2014), and an additional US$2.5 billion in liquid fixed income investments (mainly sovereign
and corporate bonds), out of which US$0.4 billion is repoed. Total liquid assets (including repo transactions)
represented 27% of the bank's total assets.
We consider Alfa's liquidity buffer as adequate in the context of its customer-driven deposit funding base. Although
around a significant proportion of deposits is either on demand or with short-term maturities; these deposits have
been traditionally rolled over, even during the times of crisis. We note however, that Alfa has high concentrations in
customer accounts, with the top-10 depositors accounting for around 28% of total customer deposits at June
2014, of which around 40% come from Alfa-Group. Related-party deposits from Alfa Group companies made up
US$3.0 billion at June 2014 (around 11% of customer deposits). These group-related deposits tend to be with
Alfa's Dutch-based subsidiary, which Alfa bank Russia consolidates for reporting purposes. We consider these
deposits as relatively sticky.
Wholesale and bilateral borrowings constitute a moderate part of Alfa's liabilities. Based on the most recent
financials, the amount of market debt maturing in the current year is small, at US$71 million (euro commercial
paper notes), around 0.15% of total liabilities. Alfa's loan-to-deposit ratio was 126% as at June 2014 which is in line
with the peer group, although indicates a medium-term dependence on wholesale funding.
Notching Considerations
Government Support
We assign a global local currency (GLC) deposit rating of Ba2 to Alfa-Bank. The GLC rating is supported by (i) the
bank's standalone credit strength of ba3, and (ii) Moody's assessment of a low probability of systemic support for
the bank in case of need. This results into one notch uplift above the bank's standalone BCA.
The bank's relatively sizeable 3% market share in retail deposits (compared with other privately-owned peers) in
Russia is a key driver behind the one-notch debt/deposit ratings uplift. We note that Alfa-Bank is the only privatelyowned bank that benefits from such systemic support in Russia and its maintenance could be sensitive to the
further pressure on the sovereign debt rating.
Foreign Currency Deposit Rating
Moody's assigns Ba2 foreign currency deposit rating to Alfa Bank. The rating is not constrained by the country's
foreign currency deposing ceiling for Russia at Ba2.
Subordinated Debt Ratings
Any new "bail-inable" sub-debt issued under Basle III guidelines would be rated lower and notched off the bank's
standalone rating.
NOTE ON DATA
This credit opinion was prepared based on consolidated financial statements of ABH Financial Limited prepared
under IFRS. ABH Financial is the holding company that owns Alfa-Bank (Russia), Amsterdam Trade Bank
(Netherlands) and a number of smaller financial companies.
Unless noted otherwise, all figures shown in this report are sourced from the bank's latest annual and interim
financial reports and our Banking Financial Metrics. These metrics are based on our own chart of account, and are
adjusted for analytical purposes. Please refer to the documents entitled "Financial Statement Adjustments in the
Analysis of Financial Institutions " published on 19 December 2013.
About Moody's Bank Scorecard
Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment.
When read in conjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the
output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated
to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in
rating committees and may be adjusted up or down to reflect conditions specific to each rated entity.
Rating Factors
Alfa-Bank
Macro Factors
Weighted Macro Profile
Financial Profile
Factor
Weak +
Historic
Ratio
Macro Credit Trend
Adjusted
Score
Assigned
Score
Key driver #1
Key driver #2
Solvency
Asset Risk
Problem Loans /
Gross Loans
4.5%
ba3
↓↓
b2
Expected trend Collateral and
provisioning
coverage
12.0%
ba2
←→
ba1
Stress capital Nominal leverage
resilience
1.0%
ba3
↓↓
b2
Expected trend
Capital
TCE / RWA
Profitability
Net Income / Tangible
Assets
Combined Solvency
Score
Liquidity
Funding Structure
Market Funds /
Tangible Banking
Assets
ba3
ba3
29.5%
b1
←→
b1
Extent of
market funding
reliance
29.6%
ba2
←→
ba2
Stock of liquid
assets
Liquid Resources
Liquid Banking Assets
/ Tangible Banking
Assets
Combined Liquidity
Score
Financial Profile
Qualitative Adjustments
ba3
ba3
ba3
Adjustment
Business
Diversification
Opacity and
Complexity
Corporate Behavior
0
Total Qualitative
Adjustments
0
0
0
Sovereign or Affiliate
constraint
Ba1
Scorecard Calculated
BCA range
ba2 - b1
Assigned BCA
ba3
0
Affiliate Support
notching
Adjusted BCA
Instrument Class
Deposits
Senior unsecured
bank debt
Dated subordinated
bank debt
ba3
Loss Given Additional Preliminary
Failure
notching
Rating
notching
Assessment
Government Local Currency Foreign Currency
Support
rating
rating
notching
0
0
0
0
ba3
ba3
1
1
-1
0
b1
0
Ba2
Ba2
Ba2
Ba2
B1
This publication does not announce a credit rating action. For any credit ratings referenced in this publication,
please see the ratings tab on the issuer/entity page on http://www.moodys.com for the most updated credit rating
action information and rating history.
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