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20.11.2008 - MDM Comment: Color, Ruble, Russian Standard, TRUST

Russian financial markets are still under pressure from the global flight to quality. Equities are down again today, with another temporary halt in trading enforced on the local stock exchanges; the Russia 30 price fell below 80 – its spread over UST heading towards 850bp. The ruble is a touch stronger against the basket (30.67) as a shortage of liquidity is forcing banks and/or clients to liquidate some FX positions. Yesterday liquidity pressures were not as dramatic, forcing the Central Bank of Russia (CBR) to sell USD2.5-2.6 bn of its reserves to defend the ruble.

Below are our key news and comments for today:

1. A number of senior government officials commented on monetary and exchange rate policy. First, Arkady Dvorkovich, the economic aide to the president, said yesterday that there will be no devaluation of ruble even if oil prices stay at low levels (we believe it is a matter of definitions; from Mr. Dvorkovich’s earlier statements it looks like he defines devaluation as a sharp and one-off weakening of the local currency). Second, Alexey Kudrin, the minister of finance, said that he supported the recent 1% weakening of ruble and labelled the 100bn fall in Russia’s reserves as a “price for stability of the exchange rate”. According to the CBR’s Chief Sergey Ignatiev, who also spoke on Wednesday, out of the USD100 bn decline, some USD57 bn was used for direct interventions in the FX market, while the rest should be attributed to EUR weakness and loans to VEB. Mr. Ignatiev also said yesterday ruble rates should stay at high levels for the time being, and that it should help prevent capital outflow. Finally, today prime-minister Putin quite indicatively said that “the government will do everything to prevent ruble from sharp moves”.

Of course, the CBR is facing a big dilemma these days. And apparently there are different views on the “right” exchange rate and monetary policy among those key officials who influence the decision-making process. We believe that during the next few weeks the CBR will continue to be doing a bit of everything, i.e. keep providing liquidity to banks, spending reserves to protect ruble and maintaining ruble rates at relatively high levels. However, if the oil price is still lingering at its current levels at the beginning of 2009, weakening of ruble will be inevitable. We do not believe the Central Bank will impose currency controls. Raising local rates to sky high levels will also hardly be efficient.

2. S&P lowered its rating on Russian Standard Bank to B+ from BB- and maintained a “Negative” outlook. We believe this is a questionable decision at best. While we acknowledge that the bank is facing a very difficult operating environment (as every bank is), it is our view that Russian Standard is one of the strongest financial institutions in Russia, and hence we view the BB- level as adequate. Russian Standard Bank has a very short-term asset structure (which supports its liquidity), excess capital (Tier 2 ratio around 23% at mid-2008 and likely increasing in 2H08) and manages well its asset quality, with NPL ratios going down (the bank has become far more selective when picking borrowers). Moreover, Russian Standard has perhaps one of the best teams in Russia and is eligible for all the Ministry of Finance’s and the CBR’s liquidity auctions. Finally, the fact the bank is heavily relying on the wholesale capital markets, has its advantages too. Unlike many other Russian banks, RUSB is immune to a depositor run.

If the environment gets worse, we see Rustam Tariko, owner of Russian Standard, simple selling all or part of the bank rather than gradually downsizing the balance sheet and loosing market share. According to the bank’s latest financial statements, the binding agreement signed with BNP Paribas expired earlier this year, leaving Mr. Tariko free to sell equity without penalties.

We believe that S&P is behaving in an overly conservative manner in this case. In fact, its rationale on Russian Standard is a bit confusing. It says “the downgrade reflects the bank's pressured refinancing capacity and near-term growth prospects amid the deepening global liquidity and credit crisis and local banking sector turbulence. The ratings reflect the bank's stand-alone credit quality, and do not include any uplift for extraordinary external support - either from owners or the government”. These comments are then followed by a relatively extensive description of Russian Standard’s strengths along the same lines as our argument above.

Trust Investment Bank finally merged into a single legal entity with National Bank Trust (B1). The merger was officially registered by the Central Bank. We see this is an important positive event for the creditors of Trust banking group. Key synergies from the merger will be displayed by more efficient liquidity management, balance sheet diversification and cost cuts (duplicating functions will be eliminated). TIBRU 09 and NBTRU 10 Eurobonds are seen trading in the 80-100% range yield wise. Latest rumors were that BNP is doing due diligence on a potential acquisition of Trust.

20.11.2008 14:25
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