The ‘B++' rating indicates that RUSSLAVBANK (CJSC) is qualified as a sufficiently reliable borrower (the highest sub-grade of the ‘B' grade). Risk of a delay in meeting liabilities is moderate, restructuring risk for a loan / part of a loan is insignificant.

RUSSLAVBANK (CJSC) qualifies as a mid-sized bank in the amount and volume of operations among the Russian credit institutions. As of April 1, 2012, the Bank ranked 170th in assets (RUB 15.3 billion) and 284th in equity capital (RUB 1.35 billion) in the Russian banks rankings according to Interfax-CEA.

RUSSLAVBANK provides the whole range of banking products and services involving Russian rubles and foreign currencies and focuses on consumer and commercial lending activities.

The top priority for the Bank is operating the CONTACT system intended for money transfers and payments. In 2011, the CONTACT customers effected almost 7 million transactions transferring a total of $3.3 billion (+11.1% year-on-year).

The rating score of RUSSLAVBANK (CJSC) is essentially supported by the high capital quality, the favorable income profile, the growing operating performance, the high liquidity, and the improving loan portfolio.

RUSSLAVBANK has achieved a relatively high level of capital quality, Tier 1 capital to Tier 2 capital as of 4/1/2012 being 20.2%. As of 4/1/2012, the Bank’s capital totaled RUB 1,353,045 thousand including the core capital of RUB 1,125,332 thousand (authorized capital: RUB 200,000 thousand, retained earnings from prior years: RUB 918,859 thousand), the additional capital being RUB 227,713 thousand.

Over the whole periods under review, the Bank’s assets have been growing slowly but steadily. Over the first quarter, they increased by 4.3% (against a negative growth of 0.2% on average in Russia’s banking sector) reaching RUB 15,275,828 thousand.

One of the things supporting the rating score of the credit institution is the good income profile. For years, the Bank’s fee and commission incomes primarily arriving from settlement transactions via the CONTACT system (accounting for over 80% of the total F&C income) ensure stability of revenues. In 2011, net fee and commission incomes accounted for about half of the Bank’s aggregate net income. The Bank’s interest incomes are also growing. In particular, the Bank’s interest income to interest expense ratio rose from 2.35 to 5.17 over the period from 1/1/2011 till 4/1/2012.

The Bank’s liquidity is relatively high. Instant liquidity ratio (N2) and current liquidity ratio (N3) are appreciably above the lower threshold values set by the Central Bank; long-term liquidity ratio (N4) is far below the maximum acceptable value. Also, the Bank’s liquidity ratios are comparable to average values in Russia’s banking system (N2: 80.3% vs. 59.7%; N3: 74.6% vs. 81.2%; N4: 72.4% vs. 82.3% as of 4/1/2012).

The Bank’s loan portfolio has been obviously improving since 2011, most obviously represented by a reduction in the combined share of problem and non-performing loans almost three-fold against 1/1/2011) almost reaching the average value in Russia’s banking system as of the start of the second quarter 2012 (7.0% vs. 6.9%). As the quality of loan assets improved, the Bank has cut down provisions against possible losses on them. As of 4/1/2012, such provisions were estimated at 11.2% of the total amount of loan receivables (against 21.0% as of the same date in 2011). The rating score is additionally supported by the appreciable reduction in the share of loan arrears in the bank’s loan portfolio from 14.0% to 7.2% over the year that ended 3/31/2012).

At the same time, the low profitability, the decreasing capital adequacy ratio and the resource base deterioration resist a higher rating score of the Bank.

Although financial results of RUSSLAVBANK basically remained positive throughout all the periods under review (2008 – Q1 2012), the Bank’s profit has been on a marked downward trend in recent years. In 2009, the Bank’s pre-tax profit decreased 1.6-fold against the previous accounting period; in 2010, it further decreased more than twice. In 2011, we saw the Bank’s net profit look up timidly, increasing by 5.7% to RUB 143.8 million. However, ROA was 1.0%, which is essentially below the average level in Russia’s banking system. In Q1 2012, we finally saw a more convincing result. Pre-tax profit almost tripled against Q1 2011; return on assets calculated for the period from 4/1/2011 to 4/1/2012 was 1.3% against 2.4% in Russia’s banking system.

The low profitability has prevented the growth of the Bank’s equity capital for two recent years. Furthermore, we saw equity capital decrease by 0.8% in Q1 2012. As assets of RUSSLAVBANK show a permanent insignificant growth, its capital adequacy ratio grows weaker: over the period from 1/1/2010 to 01.04.201, the N1 value decreased by 4.2 percentage points to 10.5%, almost touching the minimum value set by the regulatory body (10%) and far below the average value in Russia’s banking system as a whole (14.6%).

Our analysis of the Bank’s liabilities revealed that the amount of funds placed by non-credit institutions is steadily decreasing. Over the period from 1/1/2011 to 4/1/2012, it decreased by RUB 1.5 billion (17.9% of the initial amount), primarily down to the shrinking amount of funds placed by organizations and individual businessmen. As of 4/1/2012, these funds accounted for a mere 19.6% of the Bank’s liabilities (against 30.9% in Russia’s banking system). As a whole, the share of customer funds in the liability portfolio of RUSSLAVBANK was 47.6% (against the average value of 61.2%). The outflow in this segment was offset by the increasing amount of funds placed by credit institutions (RUB 6.1 billion, or 43.0% of the total amount of liabilities, as of the end of Q1 2012). The imbalance of liabilities affect the quality of the Bank’s resource base and may bring about higher interest expenses.

RUSSLAVBANK (CJSC) has been active since 1990. The Bank possesses general banking license no. 1073 granted to it by the Central Bank of the Russian Federation on December 05, 1990, and other licenses required. Since January 2005, the Bank has been participating in the Deposit Insurance Scheme. The Bank’s auditor is CJSC PricewaterhouseCoopers Audit.

CB Russky Slaviansky has a well-diversified branch network in Central Russia, with several types of points of sales: 7 branches, 35 additional outlets and 11 other organization departments.

RUSSLAVBANK has a special activity profile, operating the money transfer system CONTACT offering its customers a relatively wide range of services. RUSSLAVBANK, the founder of the money transfers and payments system CONTACT, has been historically acting as the operational, clearing and settlement center for this system. CONTACT has been operating since 1999 and now ranks second among money transfers and payments systems in the domestic market, uniting more than 900 financial institutions in Russia, the CIS countries and other foreign countries – a powerful branching network comprising over 230,000 customer service points (including payment terminals), in more than 100 countries worldwide. Millions of customers all over the world benefit from CONTACT’s services.

This press release is based on the statement of assigning a credit rating to RUSSLAVBANK.

The credit rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Company's reliability and shall not be considered as advice on the purchase and sale of securities or the provision of loan facilities to the Bank.

AK&M Rating Agency will not incur any responsibility for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010).

AK&M Ratings are recognized by the Central Bank of Russia (for providing unsecured lending facilities – Provision 323-P), Vnesheconombank (for granting subordinated loans) and SME Bank (for its program of lending to SME businesses), RUSNANO (when selecting banks to provide business banking services to project and engineering entities implementing investment projects), the MICEX (as a prerequisite for including bonds in the Corporate Bond Index / MICEX CBI and Municipal Bond Index / MICEX MBI calculation base and for listing bonds). Pursuant to an order of Russia's Government AK&M Ratings count for approving the capitalization increase procedure for banks. Besides, AK&M Rating Agency is recognized by AHML and accredited by SRO National Securities Market Association.

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Press release by: A.V. Khibukhin

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