OREANDA-NEWS. S&P Global Ratings today affirmed its 'BB-' long-term and 'B' short-term counterparty credit ratings on Russia-based Vozrozhdenie Bank. The outlook remains negative.

At the same time, we affirmed our 'ruAA-' long-term Russia national scale rating on the bank.

The affirmation reflects that we now have more clarity on Vozrozhdenie Bank's future business strategy after recent changes in the bank's ownership structure. Dmitry Orlov, the founder and previous majority shareholder of the bank, passed away in 2014. In the third quarter of 2015, Promsvyaz Capital B. V.--holding company of Russia-based Promsvyazbank OJSC--accumulated about 75% of Vozrozhdenie Bank's share capital. We understand that the new majority shareholder is unlikely to make significant changes to Vozrozhdenie Bank's historically prudent and well-articulated strategy, which has allowed it to post recurring, healthy operating profits in previous years. We also understand that during the past 12 months Vozrozhdenie Bank has enjoyed fairly stable client confidence despite the changes at the shareholder level.

We believe that Vozrozhdenie Bank's credit standing is somewhat protected from the potential negative impact that could result from Promsvyaz Capital's other activities. At the same time, we consider the bank to be a highly strategically important member of the consolidated Promsvyaz Capital banking group. Although Vozrozhdenie Bank contributes almost 18% of the group's equity or 15% of the consolidated group's assets, in our opinion, it is insulated from the unsupported group credit profile (GCP), which we assess at 'b+'. We assess Vozrozhdenie Bank's stand-alone credit profile (SACP) at 'bb-'.

In our opinion, the effects of potential weakening of the GCP on Vozrozhdenie Bank's credit profile will be limited in the short to medium term. We consider that the amount of financial support Vozrozhdenie Bank might extend to the members of the Promsvyaz Capital group will likely be modest. This is because Vozrozhdenie Bank is a regulated financial institution, and Russia's prudential regulations limit exposure to related parties to 25% of its regulatory capital (20% starting from 2017). Moreover, we anticipate that the Central Bank of Russia (CBR) would likely intervene, if needed, to limit potential financial support from Vozrozhdenie Bank to the wider group if it observed a possible negative impact on the bank's credit standing. As of June 30, 2016, Vozrozhdenie Bank's gross loans to related parties comprised 2.2% of its gross loan book, which we consider moderate. On the same date, funding from related parties was close to 0.1% of Vozrozhdenie Bank's total liabilities. In our base-case scenario, we believe that the group's strategy with respect to Vozrozhdenie Bank is clear and, in particular, the parent has a compelling economic incentive to preserve the bank's credit strength.

We continue to view Vozrozhdenie Bank's strategy as relatively conservative, which explains the bank's generally stable performance through the cycle. At the same time, we cannot exclude the possibility that the new controlling shareholder may eventually introduce more significant changes to the bank's strategy that might incorporate a combined view on the development of both Vozrozhdenie Bank and Promsvyazbank. We could revise our opinion if we were to see the new owners shift toward a more aggressive risk appetite, hampering the predictability and sustainability of the bank's business position. During the first half of 2016 and most of 2015, the bank's business growth indicators stagnated, owing to the challenging operating environment in Russia.

Vozrozhdenie Bank's reported net profit of Russian ruble (RUB) 0.5 billion (about $7.7 million) for the first half of 2016 compared with a loss of RUB0.5 billion during the same period in 2015, owing to a decrease in annualized loan loss provisioning to 2.6% in the first six months of this year versus 5.7% for full-year 2015. We anticipate that the bank's credit costs will remain at about 2.5% in 2016. At the same time, the bank's revenue base is broadly stable, indicating more sustainable earnings capacity in its core banking business than many of its peers. This has helped support its net interest margin at 4.5%-5.0% throughout 2015, while sector-average metrics were well below this range. Overall, the bank's earnings structure is healthy, with about 95% of revenues coming from interest, fees, and commissions.

The share of Vozrozhdenie Bank's nonperforming loans (NPLs) is generally in line with the sector average and stood at 7.8% of gross loans on June 30, 2016, when the bank's loan loss provision coverage ratio was an adequate 124% of NPLs. We believe that Vozrozhdenie Bank's business profile has been more sustainable than that of most midsize banks in Russia, owing to its well-established position in the relatively wealthy Moscow region, its adequate business mix, and less aggressive growth targets. Because of its track record of sound core banking profitability and strong franchise in the rich and diversified Moscow region, we currently consider Vozrozhdenie Bank's business position to be adequate, despite low systemwide market shares in the highly fragmented Russian market. We believe Vozrozhdenie Bank's new majority shareholder will aim to maintain the bank's historically sound business focus and strategy at least in the near term.

The negative outlook reflects the challenges of the difficult operating environment in Russia, which we expect will constrain profitability due to high credit costs. This could potentially erode the bank's capital buffers.

We could lower the ratings on Vozrozhdenie Bank if such operating conditions lead to a significant deterioration of its risk profile or earnings power, resulting in an increase in NPLs and significantly higher loan losses than the system average. This could weaken the bank's capital position, as shown by our forecast risk-adjusted capital ratio falling below 5%.

A downgrade could also stem from a marked increase in risk appetite driven by changes in the bank's ownership and strategy. In our opinion, a potential merger with Promsvyazbank might introduce implementation challenges for both banks, especially in the current adverse market conditions. In our base-case scenario, we don't expect the two banks to be merged in the next 12-18 months, however.

We do not expect to revise the outlook to stable within the next 12-18 months because operating conditions in Russia will likely remain tough over that period.