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UFS Investment Company - Russlavbank's Ruble Bond Offering, Jul 18, 2013.

Russlavbank's Ruble Bond Offering. Good Things Come in Small Packages

Russlavbank is offering debut ruble bond issue worth 1.5 bln rubles with the yield benchmark of 12.89-13.32% p. a. with a 1- year put-option.

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Overall, we find the issuer's credit risks low, according to B3 rating from Moody's. The expected persistent pressure of weak asset quality on ROE and capital adequacy will be offset by owners' contributions to the equity. Large share of liquid assets on the balance sheet provides good opportunities for loan portfolio growth in case of adequate additional


For comparison with Russlavbank we have considered Svyaznoy Bank with a similar business-model and assets structure. At the moment Svyaznoy Bank's issue BO-1 is yielding 12.11% p. a. A slight difference in terms of credit metric, duration, as well as the need for debut premium define the fair yield for the new issue as 12.6-12.7% p. a. Hence, if the issue is offered at the lower end of the yield range, in the secondary market the yield may fall 20-30 b. p., accordingly, price will increase 0.2-0.3%.

General Overview

The bank has been in the market since 1990, specializing in servicing individuals and small and medium businesses.

The bank successfully endured the crisis. In 2008-2009 the company remained profitable. Assets continued to increase.

During this period the bank managed to maintain the share of customers' accounts at 60-65% in the total funding, which is the indicator of customers' confidence in the bank.

The company established and is the key operator of CONTACT payment system. The bank is actively developing retail lending based on the customers using this system. The bank reports the payment system's market share reaches 45%. In 2012 turnover totalled $5.2 bln; the number of transactions amounted to 12 mln. Over 10 mln system users are the potential customers of the bank.

At the moment the bank is controlled by practically the sole owner a [ETH]. M. Abdulkerimov is the key beneficiary with 80% stake.

In RBC rating by assets as of April 1, 2013 the bank ranked 158th among Russian credit organizations. Russlavbank's network includes 6 branches, about 40 additional offices, 5 cashier's desks. The staff amounts to about 1,000.

Financial Profile

The bank has modest assets. At the end of 2012 total net assets totalled 22.2 bln rubles, with more than a quarter made up by cash and cash equivalents, which ensures solid liquidity on the balance sheet. Net loan portfolio, by 69% comprised of retail loans, accounts for 42% of net assets.

In the last three years Russlavbank has considerably improved asset quality, having cleared its balance sheet of low-quality loans, piled up during the crisis. In effect, the share of NPL 90+ decreased from 26.8% at the end of 2009 to 11.8% in 2012. As a consequence, in 2012 charges for provisions exceeded net interest income. Besides, considerable fee and commission income generated by means of transactions via CONTACT payment system, allowed to reach near- zero ROE.

At the end of 2012 103.4% of nonperforming loans were covered by provisions. This is not a conservative level,

and in 2013 ROE will remain under pressure of asset quality.

Notably, the bank is reporting steadily good margins. In 2012 net interest margin plus fee and commission income increased from 12.07% to 14.22% as a result of yield on assets increase.

The bank has a well-diversified resource base. Customers' accounts make up slightly more than a half of total liabilities. Retail accounts and deposits make up about two thirds. Banks's accounts (38% of liabilities) are mainly comprised of correspondent accounts needed for transactions via CONTACT. Securities (bills issued on the bank's balance sheet) account for less than 2% of total liabilities.

The new issue will help additionally strengthen and diversify the resource base. However, the offering even at the lower end of the announced yield range will increase cost of funds.

The bank's capital adequacy according to CBR's standards behaves quite volatile. The latest [ETH]1, recorded on June 1, 2013, was 12.03% p. a. During the last 12 months it ranged within 10.3-13.3%. According to IFRS statements, revaluation of fixed assets was the key driver of equity growth in 2012, when the bank reported negative profit. In H2 2013 the bank is planning to boost equity by 1.5 bln rubles to 4.5 bln rubles on shareholders' contributions. Artificial increase of equity already took place in 2011, by 600 mln rubles, and at the start of 2013, by 580 mln rubles.

Overall, we find the issuer's credit risks low. The expected persistent negative impact of weak assets on ROE and capital adequacy will be offset by shareholder's contributions. Large portion of liquid assets on the balance sheet provides good opportunities for loan portfolio growth in case of adequate additional capitalization.

Positioning of the New Issue

Russlavbank is offering a debut ruble issue in the sum of 1.5 bln rubles with the yield range of 12.89-13.32% p. a. and a put-option in a year. In our view, Svyaznoy Bank is its closest counterpart, whose issues we assessed in one of our previous reviews as compared to TCS Bank's curve. At the moment Svyaznoy Bank BO-1 is yielding 12.11% p. a. The fair spread between the new Russlavbank's issue and Svyaznoy Bank's issue is due to a 3.5 excess in Svyaznoy Bank's assets. On the other hand, Russlavbank's operating model endured the crisis, whereas Svyaznoy Bank was founded in 2010. As for the rest, the banks have approximately similar credit metrics, namely asset quality, ROE and capital adequacy.

Another important factor is that Russlavbank is offering a debut issue, which necessitates an additional premium. In addition, duration of Svyaznoy Bank's bonds has already declined to 0.88 years. Duration of the new issue will total 0.97 years, so the fair yield is in the range of 12.6-12.7% p. a. Hence, if the issue is placed at the lower end of the range, in the secondary market the yield may fall 20-30 b. p., which will cause price growth by 0.2-0.3%.


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Publication:Russian Banks and Brokers Reports
Date:Jul 18, 2013
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