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27.05.2008 - MDM Comment: Russian Standard published 2007 IFRS
Russian Standard Bank (Ba2/BB-/BB-) released the 2007 IFRS audited consolidated financial statements yesterday. Generally the results are of no surprise, given the availability of monthly Russian GAAP reports filed by the bank (including 1Q08). Below is brief analysis of the released document:
1. Due to the regulatory pressures and funding constraints that emerged in 2007, the bank had to cancel fees/commissions and slow down new loan issuance. As of the end of 2007, loan book was down 2% y-o-y. In fact, the decline would perhaps have been more significant, if one factors in securitizations, which are consolidated under IFRS as the bank retains credit risk (via an equity tranche). We believe that loan book stagnation is a headache for the shareholders, but is not a bad thing from a credit perspective.
2. Profitability has declined. The bank’s adjustment of its business model (cancellation of fees and commissions since August 07) resulted in a one-off charge on the carrying value of loans. The charge itself is quite questionable and, in our view, overly conservative (loans are viewed as financial instruments and reflected below par if interest rates are lowered). As a result, the bank's bottom line was around zero in 2H07. Still, overall in 2007, the bank reported a net income of RUB9.5 bn, and delivered an above sector average return on assets and equity. As seen in the 1Q08 Russian accounts, the bank has somewhat restored its profitability (RUB3.4 bn in net income). However, going forward, one shouldn't expect to see the outstanding returns that were delivered by the bank in 2005-2006, as the spread between effective interest rates and funding costs has significantly narrowed.
3. Asset quality remains adequate. Russian Standard reported a rise in NPLs to 5.5% vs. 4.7% in 1H07. We attribute that entirely to the ‘seasoning effect’ as loan book is stagnating. Moreover, having cancelled fees/commissions and slowed new loan issuance, the bank now applies more stringent criteria when selecting borrowers, which should result in better quality of loan book.
4. The bank’s sustainability remains rock solid, as cash balances are significant, Tier 2 ratio is around 20% (even after the recently announced dividend payout) and its asset structure is very short, so that the bank can turn almost half of its balance sheet into cash in three months time.
We remain constructive on the bank’s credit situation and expect the rating agencies to take away their "Negative" outlooks on Russian Standard once a rebound in profitability is confirmed in 1H08 IFRS statements (due in August-September).
