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14.04.2008 - MDM Comment: Russian Standard Bank
Russian Standard Bank (Ba2/BB-/BB-) was in the news late on Friday for two reasons. First, S&P revised its rating outlook to Negative, and second, the bank's major shareholder may decide to pay RUB4 bn in dividends at the forthcoming shareholder meeting in May, according to Interfax.
We do not have a great deal to say regarding the S&P move. The rating agency appears to have preferred an overly cautious approach and has followed its counterparts from Moody's (revised outlook to Negative in Oct 07) and Fitch (downgraded the bank 1 notch to BB- in Oct 07). Formally, there are reasons: Access to wholesale funding has significantly reduced, while regulatory pressure resulted in cancellation of commissions. All three rating agencies, however, continue to highlight that the bank remains fundamentally strong. We agree with this message, as we see Russian Standard having strong market positions, solid capitalization ratios, a short-term asset structure (protecting from liquidity risks), and a high quality of management. We expect the bank to gradually restore profitability in 2008 after it spent 2H07 re-adjusting its business model to the changed environment. Its results in 2H07 were therefore likely to be much weaker compared to 1H07. As soon as the bank shows recovery in profitability, we would expect rating agencies to react positively.
The news about the potential dividend payouts in fact appear more interesting to discuss. Previously, Mr. Tariko, the sole beneficiary, has kept most profits in-house to support the growth of the bank – even if it was considered overcapitalized, everyone understood that the capital would be needed to fuel further growth. It now seems that in the upcoming months the management will be unable to deliver loan portfolio growth due to funding constraints, hence some of the excess capital may be taken out to fund Mr. Tariko’s other projects. We estimate the total capital of Russian Standard Bank at around RUB35-37 bn as of 2007FYE, Equity/Assets ratio at around 15-17%, and TCAR at 20-23%. While we do not see any reason to be seriously concerned about the dividend payouts, we believe that RUSB bondholders will not be happy to hear the news, and would like to see the capital cushion remain as large as possible in these difficult times.
In a further development of this story, this morning a bank representative confirmed to us both the dividend payout plan, and the fact it relates to availability of excess capital.
We continue to like local bonds of Russian Standard as a very good leveraged carry play. The Central Bank provides guaranteed refinancing of RUSB bonds at a rate of 6.25% with a 17.5% haircut. We are neutral on RUSB Eurobonds.
