CJSC AK&M Rating Agency upgraded the national scale credit rating of RUSSLAVBANK (license no. 1073) to 'A' (tier 3), with a stable outlook.

The 'A' rating indicates that RUSSLAVBANK qualifies as a highly creditworthy credit institution. The risk of a failure to meet obligations in time is low, the full or partial debt restructuring risk is minimal.

The Bank's previous rating was 'B++' with a negative outlook assigned on April 30, 2014.

The rating restoration reflects a number of effective measures taken by the Bank's shareholders and management team to overcome the danger brought about by the market response to the credit institution's soaring reputation risk in connection with certain legality issues in late April 2014. In particular, several partner banks suspended transactions via the CONTACT payment system and withdrew ca. 4 billion rubles from loro accounts, which eventually cut into the Bank's liquidity and impaired the stability of its financial profile (the N2 asset test ratio as of May 1, 2014 being a mere 19.8%). Another aftermath of the same negative events was a powerful outflow of deposits made by companies and enterprises reaching almost RUB 3 billion, compared with an insignificant outflow of retail deposits.

In this situation, to restore its liquidity position, the bank raised funding from Otkritie FC and other credit institutions (ca. RUB 5.0 billion) selling and transferring under a repo scheme some of its loan portfolio. This move strengthened the Bank's eroded liquidity position. The N2 ratio was 99.9% on June 1, 2014, 143.2% on July 1, 2014. The next stage of RUSSLAVBANK's cooperation with the Otkritie group was the signing of an agreement to set up a holding uniting the Rapida and CONTACT payment systems, capable of becoming one of the biggest players in the domestic market of payment services, in particular, in the segments of e-payments and cash transfers.

By the end of the year, the bank expects to have almost completely restructured its credit pool shaking off low-grade loans and increasing the share of the high-margin retail lending segment. This will partially offset the potential profitability losses arising from the exclusion of the CONTACT payment system from the credit institution's scope of activities. Besides, the Bank wants to take out a ca. RUB 1 billion subordinated loan to absorb these losses and maintain a high capital adequacy.

At the same time, we regard the high percentage of debt arrears, the impaired income structure, the lower profits and return ratios as negative rating drivers for RUSSLAVBANK.

The most robust part of the loan portfolio sold (pledged), the debt in arrears in absolute amount was almost unaffected, while its relative weight grew from 7.8% to 11.8% (as of May 1, 2014 and June 1, 2014, respectively). The loan arrears in the retail lending segment on the same dates reached 8.5% and 14.3%, respectively, significantly above the average benchmarks in the banking sector.

The shrinking loan portfolio caused a natural reduction in interest earnings (about 7% in the second quarter of 2014 against the previous quarter). Another weak point for the Bank is the strong decline in its net fee and commission income (more than twice). As a result, the Bank's pre-tax profit for H1 2014 was RUB 145.4 million, a mere 15% of the preceding 12-month result. Return on assets fell from 3.4% to 0.9%, return on equity dropped from 33.6% to 7.1%; however, both ended up being commensurate with the average levels in Russia's banking system (0.8% and 13.6%, respectively).

RUSSLAVBANK (Commercial Bank Russky Slaviansky Bank Closed Joint-Stock Company) has been operating in the market of banking services since 1990. The Bank's regional network comprises 3 branches, 19 satellite and operational offices, 7 loan desks and 7 stand-alone cash desks.

RUSSLAVBANK is licensed by the Central Bank of Russia (general banking license no. 1073 as of January 5, 2003). In December 2004, the Banking Supervision Committee of the Central Bank permitted RUSSLAVBANK to join the Deposit Insurance System (DIS). Since 2012, the Bank's reports have been audited by CJSC KMPG, the largest Russian audit firm in 2011, according to the Kommersant Dengi weekly.

RUSSLAVBANK is a medium-sized Russian credit institution in terms of asset size and volume of operations. As of July 1, 2014, the Bank ranked 138th in assets (RUB 29.2 billion), 123rd in equity (RUB 4.8 million) among Russian banks, as estimated by Interfax-Center for Economic Analysis.

The bank provides all kinds of banking products and services involving Russian rubles and foreign currencies, specializing in retail lending and household deposits.

Since 2013, RUSSLAVBANK has been providing retail financial services under the CONTACT Bank brand.

This press release is based on the Statement of assignment of a credit rating to RUSSLAVBANK.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Bank's creditworthiness and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

CJSC Analysis, Consulting and Marketing Rating Agency is a leading independent national rating agency engaged in rating activities since 1993. CJSC AK&M Rating Agency is accredited by the Ministry of Finance of the Russian Federation (order no. 452 as of September 17, 2010) and is on the Central Bank of Russia's Register of Accredited Rating Agencies.

CJSC AK&M Rating Agency

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www.akmrating.ru

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