The 'B++' rating indicates that BANK ELITA qualifies as a sufficiently creditworthy borrower. The risk of a delay in meeting obligations is moderate, the full or partial debt restructuring risk is insignificant. The rating assignment was based on the Credit Rating Methodology for Banks and their Debt Instruments rev. February 25, 2016.

BANK ELITA is a relatively small regional credit institution. Its principal shareholder is Kaluga region represented by the Ministry of Economic Development of Kaluga region which holds a 99.6% equity stake in the rated Bank. The regional network of BANK ELITA comprises 4 satellite offices in Kaluga region and 2 operational cash desks in Kaluga. The Bank's core activities include lending to small and medium-sized businesses, management of accounts of government entities, retail deposit-taking.

In AK&M Rating Agency's view, the credit rating of BANK ELITA is supported by a high level of provisions considerably exceeding the average level in Russia's banking sector. As of August 1, 2016, the Bank's provisions for possible loan losses amounted to RUB 386 million exceeding the Bank's overdue debts receivable by 44%. In the period under review, BANK ELITA maintained a high level of security for the loans provided (106%), which may be used as a source of loss recovery (should the loan risk materialize) and helps strengthen the borrowers' payment discipline.

Another positive rating driver is the Bank's good equity capital adequacy. This year's lowest point for the N1.0 ratio is 20.6% exceeding the average level in the Russian banking system more than 1.5 times (12.4% as of July 1, 2016).

We also appreciate improvements in deposits raised from the population the key funding source for the Bank. As of July 1, 2016, private deposits reached RUB 1 billion growing by 51% since our previous review on July 1, 2015, an evidence of the population's loyalty to the credit institution

Total net incomes earned by BANK ELITA in the first half of this year is 82% above the result achieved for the same period in 2015. It should however be noted that the Bank's stronger financial performance resulted from a reduction in provisions for possible losses by 87%.

The Bank's credit rating is constrained by substantial capital erosion, continuing loan portfolio impairments, and an outflow of corporate deposits.

In the period since our previous review, the quality of the Bank's capital decreased substantially as the credit institution resorted to subordinated financial instruments provided to it as a measure of support from the owner. As of July 1, 2016, the subordinated loan amounted to RUB 349.7 million. Therefore, the Tier 2 capital to core capital ratio soared from 0.23% to 173% in the period from July 1, 2015 to July 1, 2016.

This year, the Bank has seen further loan portfolio impairments. The share of problem and non-performing loans increased by 3% p.p. for the 7-month period reaching 24.6% on August 1, 2016, while the average percentage in the banking sector of Russia is 9.7%. The amount of debt more than 30 days in arrears grew from 4.3% to 12.7% for the same period. Again, most of the loans (91% as of August 1, 2016) are over 180 days in arrears.

In the first half of 2016, the corporate deposits of BANK ELITA decreased by 18%, which caused a RUB 110 million reduction in the Bank's liabilities. As a result, assets of BANK ELITA decreased by RUB 88 million. In particular, the highly liquid asset component decreased by RUB 164 million (-51%) net loans receivable by RUB 86 million (-4.5%). Therefore, as of July 1, 2016, the ratio of highly liquid assets to total assets dropped from 13.5% to 6.9%, while the average percentage is 11%.

BANK ELITA possesses a license to provide banking services involving Russian rubles and foreign currencies (without accepting money deposits from individuals) and a license to accept ruble- and foreign currency-denominated money deposits from individuals, both issued on April 1, 2014. The Bank has been a member of the deposit insurance system since November 25, 2004, DIS registration no. 220.

AK&M Rating Agency assigned a credit rating to BANK ELITA for the first time on June 15, 2009. The last rating action in relation to the Bank was taken on July 16, 2015. All rating action announcements are available on the akmrating.ru website.

The rating is valid until September 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the Bank's creditworthiness are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the Bank. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

This press release is based on the Statement of assignment of a credit rating to BANK ELITA. The rating assignment was based on the Credit Rating Methodology for Banks and their Debt Instruments rev. February 25, 2016.

The rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion 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.

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

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