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Standard & Poor’s Ratings Services placed its ‘B’ long-term and ‘C’ short-term counterparty credit ratings on Russia-based Russian Standard Bank ZAO (Russian Standard) on CreditWatch with positive implications following the announcement that Cetelem (AA/Stable/A-1+), a key consumer finance subsidiary of BNP Paribas (AA/Stable/A-1+), had reached a shareholders’ agreement to acquire a 50% stake in the financial holding arm that controls more than 90% of Russian Standard.
Expected to close by the end of 2004, the transaction is subject to the approval of the Russian banking and competition authorities. The extent of the positive impact on the ratings will depend on the approval and completion of the transaction, as well as on the development of Russian Standard’s financial profile and strategy. Depending on the outcome of the transaction and the extent of Cetelem’s future strategic involvement in Russian Standard, the ‘ruBBB+’ national scale credit rating on Russian Standard could also be positively affected.
Standard & Poor’s will meet with both Cetelem and Russian Standard to determine the extent of Cetelem’s strategic plans with respect to Russian Standard and the ensuing governance structure of the bank and its holding company pursuant to Cetelem’s investment. However, with less than a majority stake in the bank, Cetelem’s incentive and ability to provide support to Russian Standard in case of need could be limited.
The current ratings on Russian Standard reflect its leading position in the nascent Russian consumer finance market, successful business model, and strengthening financial profile, including improving profitability, geographically diversified business, and improved funding resources. Nevertheless, the ratings are constrained by the high risks of operating in the fast-growing and untested Russian consumer finance market, the bank’s relatively short operating history, and its high dependence on wholesale funding.
Consumer finance is booming in Russia, and Russian Standard is a leader in the sector. The bank’s retail loans tripled to Rb14bn (US$477mn) at December 31, 2003, on a year-on-year basis and grew by further 40% to Rb18.7bn at June 30, 2004. Russian consumers, both in Moscow and throughout the Russian Federation, have started to embrace the purchase of white and brown goods on credit. Seventy percent of Russian Standard’s new loans are to individuals outside Moscow.
The bank’s profitability soared in 2003 as strong revenue generation outpaced expense growth in the booming market. Wide net interest margins in consumer lending leave Russian Standard with a healthy profit after overheads and credit losses. In the benign economic environment of the past two years, the bank has limited loan losses to manageable levels, although the behaviour of borrowers in such a stressed environment is much more difficult to manage.
Although Russian Standard is heavily reliant on wholesale funding, it is improving the overall structure and diversity of its funding. Capitalisation is currently adequate. The capital-to-assets ratio was 23% at June 30, 2004, but lending volumes are expected to maintain rapid growth, which is expected to dilute capitalisation levels.