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

Alef-Bank qualifies as a mid-sized Russian credit institution in terms of the amount of business. As of July 1, 2014, it ranked 179th among Russian banks in terms of asset size, 183rd in terms of equity capital size, in terms of 169th in terms of net profit.

Headquartered in Moscow, Alef-Bank operates a branch network in 5 regions of the Russian Federation. The Bank provides the whole range of banking products and services involving Russian rubles and foreign currencies to legal entities and private customers.

The credit rating of Alef-Bank is essentially supported by the growing balance sheet and operational performance indicators in 2013 and the first half of 2014.

The main reason for improvements of the Bank's performance indicators is the high, well-structured and growing equity capital. In particular, the Bank's equity capital increased by RUB 201.7 million (7.6%) in 2013, by RUB 162.9 million (4.2%) in the first half of 2014. The capital adequacy ratio is 1.6 times above the average level in Russia's banking system, and, unlike the latter, is growing. The Bank's capital quality (tier 2 to tier 1 capital ratio) has permanently been near the threshold recommended by the Central Bank of Russia (no more than 30%) and fully met the requirement on the last reporting date (29.29% as of July 1, 2014).

In 2013 and the first quarter of 2014, benefiting from last year's strong base, the Bank increased the amount of liabilities by 43.0% (from RUB 11,404 million to RUB 16,311 million). At the same time, the Bank improved the diversification of funding sources. The funding base expansion enabled the Bank to increase assets by 37.6% (from RUB 13,553 million to RUB 18,684 million) for the same period, while preserving the share of net loans receivable fairly high (62.0%).

We also appreciate a substantial improvement in Alef-Bank's profit metrics both in 2013 and in the first quarter of 2014. Pre-tax profit improved by 66.9% 2013, by 49.1% year-on-year in the first quarter of 2014.

The Bank's profit increased faster than its capital and assets did, resulting in a higher operating performance and growing ROA / ROE ratios to 1.4% and 7.9%, respectively, against a decline in the average return ratios in Russia's banking sector.

We regard the well-balanced liquid assets and liabilities in terms of maturity as a positive signal for the credit rating. Overall, both individual and integral quality of liquidity and credit exposure ratios are well above the average levels in Russia's banking system and further improving, indicating a smart risk management policy.

At the same time, the growing funding costs, the loan portfolio deterioration, the higher debt arrears and the high share of active and passive operations with non-residents are putting pressure on the Bank's rating. The latter is not typical for the Russian banking system: as of August 1, 2014, the loans provided to non-residents and other funds placed with them accounted for more than 50% of the Bank's assets against 14% in Russia's banking sector.

One of the risk factors for the Bank is the growing cost of borrowing. At the end of the first quarter of 2014, it reached 5.6% p.a., 1.7 times above what it had been at the start of 2013 (3.3%). The ensuing outstripping growth of interest expense caused a substantial reduction in the share of net interest income in the Bank's overall income profile.

The major loan portfolio deterioration also raises concern. As of July 1, 2014, the combined share of loans of quality grades 1 and 2 decreased to 29.2% against almost twice as high a share at the same moment in 2013 (54.8%). The percentage of problem and non-performing loans grew from 10.3% to 38.1%, more than 6.4 times above the average level in Russia's banking system.

Another negative point is the deterioration of the retail loan book. On July 1, 2014, it was dominated by problem loans (89.7%), although the share of loans of quality grades 1-3 was 64.3% 12 months before that (on July 1, 2013). The huge level of problem loans in the retail loan portfolio impaired the Bank's loan portfolio as a whole. Private customers accounted for 76.2% of all the quality grade 4 loans receivable (problem loans).

The Bank's debt arrears increased twice reaching 3.2% of the total amount of loans receivable on July 1, 2014. However, while this considerable increase cannot be neglected, the debt arrears are still below the average percentage in Russia's banking sector.

Official Bank name: Alef-Bank.

Alef-Bank has been operating in the market of banking services since 1992. The Bank possesses general banking license no. 2119 as of February 8, 2013 issued by the Central Bank of the Russian Federation. The Bank is a member of the deposit insurance system, reg. no. 794 as of March 21, 2005.

This press release is based on the Statement of assignment of a credit rating to Alef-Bank.

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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