10/03/2022 13:19
Rating Agency Standard and Poor’s downgraded RCB bank’s long-term issuer credit rating to `B+` from `BB-` and placed its ratings on CreditWatch with negative implications, citing the impact from the lack of support by its previous major shareholder, the Russian VTB, as well as “potential second-hand effects of Russian economic activity, including deposit run-offs.”
RCB, Cyprus’ third largest lender, on February 24 announced that VTB Bank PJSC sold its 46.3% stake in RCB to the bank`s Cypriot shareholders, who represent the management, as part of a plan “to protect RCB Bank from escalating geopolitical tensions.” Following the Russian military intervention in Ukraine, VTB was included in the sanctions list.
“RCB Bank`s business prospects will likely be affected by weakened volumes, lack of support from VTB Bank (previously its largest shareholder), business origination, and the potential second-hand effects of Russian economic activity, including deposit run-offs,” the agency said.
The agency said that “RCB Bank has been protected through a mix of forward planning actions and a change of control,” adding that “VTB Bank`s sale of its stake in RCB Bank contributed to alleviating RCB Bank`s financial profile.”
Furthermore, the agency said RCB Bank`s capitalization and risk profile have somewhat improved, through RCB Bank`s unwinding of its largest loan in Kazakhstan, which made up over 30% of its loans.
“As a result, we now expect our risk-adjusted capital ratio to be sustainably above 10%. The loan book is now also more granular, provided there are no further shocks that affect the bank. RCB Bank also increased its long-term funding through the issuance of a €200 million senior-nonpreferred instrument and a €300 million term deposit (both funded by VTB Bank), providing some buffer for customer deposit outflows,” S&Ps added.
It pointed out however that “RCB Bank`s business prospects and the sustainability of its business model will be hampered by its new stand-alone model.”
“Without VTB`s support for business growth, the bank will have to reshuffle its business strategy. In our view, this will take time, and might be complicated given the bank`s niche and limited franchise,” the agency said, adding that “reduced loan volumes, which declined by over 30% following the unwinding of RCB Bank`s largest loan in January 2022, and volatile market conditions will likely weigh on the bank`s profitability prospects in the next 12-18 months.”
“RCB Bank`s market franchise in Cyprus is limited compared with the two largest players (about 8% loan market share). Also, its niche focus might hamper its business profile due to second-hand effects from the military conflict between Russia and Ukraine,” it said.
Moreover, the agency said that given the uncertainty on several factors, we think that the ratings on RCB Bank could come under further pressure. “The regulatory approval needed from the European Single Supervisory Mechanism for the change of control, potential changes to the capital management policy under new business plans, possible further customer deposit outflows, or, in a more adverse scenario, regulatory sanctions could all weigh on the ratings on RCB Bank,” it said.
Furthermore, the agency added that the “negative CreditWatch placement reflects our opinion that the increased geopolitical and economic risks to the Russian economy could further constrain RCB Bank`s customer deposit outflows and its funding profile” and the “reflects the uncertainties on the pending regulatory approval and any potential governance risks that could arise from historical links between RCB Bank and VTB Bank.”
Concluding, the agency said it aims to resolve the CreditWatch once we have more clarity on the full macroeconomic repercussions of the sanctions against Russia and its related entities and the evolution of the geopolitical conflict, as well as visibility on the volatility of RCB Bank`s customer deposits, and the regulatory approval of the change of control.