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Standard & Poor’s Ratings Services has revised its outlook on Russia-based Alfa Bank to stable from positive. At the same time, Standard & Poor’s also affirmed its ‘B’ long-term and ‘C’ short-term counterparty credit ratings on the bank, as well as its ‘ruA+’ national-scale rating.

“The rating action reflects the recent volatility in the Russian banking sector and the reduced potential for Alfa Bank to be upgraded in the short-to-medium term. The stable outlook balances the bank’s growing franchise and diversity of business lines with the institutional weaknesses of the Russian banking market
and economy,” says Standard & Poor’s credit analyst Ekaterina Trofimova.

In July 2004, the Russian banking sector experienced a period of heavy turbulence, characterized by illiquid wholesale markets and runs on retail banks. Alfa Bank was hit more than the other top-tier private sector banks, losing retail and corporate deposits, and was driven to take exceptional operational and financial measures to be able to meet heavy cash withdrawals. The severity of the depositor run was such that the principal owner of Alfa Bank, Mikhail Fridman, felt the need to publicly state support for his bank and to place new deposits of more than US$800mn in Alfa Bank. The measures taken by Alfa proved effective in stemming the deposit outflow, but the bank’s strategic goal of expansion, particularly in the retail banking segment, suffered a setback. In the medium term, Alfa Bank remains well positioned to develop its banking business across the expanding Russian economy.

The ratings on Alfa Bank reflect the bank’s high single-party concentrations, limited capitalization, and high cost base, offset by its expanded commercial network and widening range of services, as well as improvements in its retail and investment banking services, internal IT systems, and risk management.

Profitability remains limited, however, by high operating expenses due to branch network expansion and the development of IT systems. Capital is only adequate with respect to the bank’s risk profile.

“In Standard & Poor’s opinion, its credit rating on Alfa Bank will not change in the short-to-medium term. While the long-term prospects for Alfa Bank and
many other private sector banks are promising, their performances during the rest of 2004 remains unpredictable and could still be turbulent,” adds Trofimova.

Standard & Poor’s will closely monitor the ability of Alfa Bank to regain the customers and deposits that left during the recent turmoil. More generally, the successful implementation of regulatory reforms will be key to its future credit standing and to that of all private sector banks in Russia.