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December 26, 2013 11:30

S&P affirms Vnesheconombank "BBB" rating, outlook stable (Part 2)

MOSCOW. Dec 26 (Interfax) - Standard & Poor's Ratings Services has affirmed its 'BBB/A-2' foreign currency and 'BBB+/A-2' local currency long- and short-term counterparty credit ratings on Russian government-owned development bank Vnesheconombank (VEB), the agency said in a press release.

The outlook is stable.

"The affirmation balances our expectation of timely and sufficient government support in almost any circumstances against a gradual weakening of VEB's financial profile, notably risks accumulated on its balance sheet. VEB's internally calculated capitalization remains under pressure because of continued portfolio growth and expected deterioration of loan portfolio quality. However, we consider that the Russian government is seeking a solution to VEB's weakening capitalization, seen for example in the news of a potential subordinated loan from the National Wealth Fund, and other options of support. Failure to maintain this internally calculated ratio above 10% could trigger substantial early repayments of some financial obligations and therefore could significantly deteriorate VEB's liquidity position. Should this risk appear close to manifesting, it would likely result in a change to our ratings or outlook on VEB," S&P said.

"We base our ratings on VEB on our opinion of its status as a government-related entity (GRE) with an 'almost certain' likelihood of timely and sufficient extraordinary support from the Russian government in case of financial difficulties. We therefore equalize our ratings on VEB with those on the Russian Federation (foreign currency: BBB/Stable/A-2; local currency: BBB+/Stable/A-2; Russia national scale 'ruAAA').

In accordance with our criteria for GREs, our view of an 'almost certain' likelihood of extraordinary government support is based on our assessment of VEB's 'critical' role for Russia as the government's prime public development institution, as well as its 'integral' link with Russia.

As a result, our local currency long-term credit rating on VEB is several notches higher than its stand-alone credit profile (SACP), which we currently assess at 'bb-', down from 'bb'. The revision of the SACP to 'bb-' reflects our expectation of continued deterioration in VEB's asset quality.

The 'bb-' SACP is based on our 'bb' anchor for financial institutions operating primarily in Russia, as well as the bank's 'strong' business position, 'moderate' capital and earnings, 'weak' risk position, 'average' funding, and 'adequate' liquidity.

The stable outlook reflects that on Russia. It incorporates our view that the government will provide sufficient support to VEB so as to prevent VEB's internally calculated capitalization ratio deteriorating below 10%. Future rating actions on VEB, positive or negative, will likely follow those on the sovereign, assuming ongoing government support is provided in line with our expectations, and VEB's public policy functions remain unchanged.

We might lower our local currency long-term rating on VEB over the next two years--even if the sovereign local currency rating remained unchanged-if VEB's link with the government weakened; for example, if VEB lost its special legal status. We could take a similar action if the government reduced VEB's role as a prime development institution. We do not currently expect either of these scenarios to occur, but if they did, it could lead us to lower the local long-term currency rating on VEB by one notch, if the SACP remains at 'bb-'.

A deterioration of VEB's financial profile, notably due to any doubt about the government's willingness to timely support its capitalization ratio above the internally calculated 10% ratio, might lead us to question the government's willingness to support VEB. This is not our base-case scenario, but in such a case we might reassess the number of notches of support we currently accord the rating on VEB according to our GRE methodology as well as the level of its SACP, which could fall to the 'b' category. In this hypothetical case, we could see substantial liquidity and capital pressure adding to the existing elevated credit risks," S&P said.

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