OREANDA-NEWS. July 26, 2012. The international rating agency Fitch Ratings downgraded the Issuer Default Rating of MDM Bank to BB- with a negative outlook, from BB with a stable outlook. The agency’s analysts marked the increased share of problem loans in the bank’s corporate loan portfolio and negative 2011 profitability figures as the principle factors which have weakened the rating.

Despite the rating downgrade, we do not expect that this decision will negatively affect MDM Bank’s current business. The growth dynamics of the bank’s asset operations funding derives from a diversified deposit and customer account base. The wholesale funding share of the bank’s balance sheet is moderate, with no necessity for any significant refinancing. Therefore, the impact of the rating downgrade on the bank’s business development is assessed as neutral.

In the beginning of 2012, the new management team of MDM Bank developed a plan to eliminate the factors restraining the growth of the bank’s business, which included improving operating efficiency, resolving the issue of problem assets by selling them to a specialized fund, and stabilizing the corporate business and retail business growth volumes. From Q1 2012, MDM Bank initiated the gradual implementation of this plan. Positive results are currently being observed, and we believe this verifies the correctness and efficiency of the measures. As of today, we expect that MDM Bank will be able to demonstrate a material improvement of all its core financial figures in its 2012 financial statements.

Reference Information on MDM Bank’s Financial Performance:

In 2011, MDM Bank adopted a strategy aimed at improving the quality of its fresh loan portfolio, with a more conservative approach to provisioning for problem loans. As a result, at the end of 2011, MDM Bank made significant additional provisioning charges, of RUB 10.4 bln, against the problem and watch-list loans that had been accumulated primarily during the pre-crisis period. The overall coverage ratio was thereby raised to 106%. At the same time, these additional reserves negatively impacted the bank’s IFRS financial result, and it recorded losses for FY 2011. Without such additional provisioning charges, the bank’s income in 2011 would have totaled RUB 2.1 billion.

MDM Bank’s key financial figures, which ensure the potential for further business development, remain stable: the bank’s capital adequacy of 17.8% is among the highest in the banking sector. Retail deposits, which are a priority funding source, totaled 38% of MDM Bank’s total liabilities at YE 2011. The new deposits raised in 2011 stand at around RUB 142 bln. The volume of highly liquid assets stood at RUB 77 bln, or 22% of MDM Bank’s total assets as of YE 2011.