BELARUS NEWS AND ANALYSIS

DATE:

25/08/2009

S&P: Banks In Belarus Face Continuing Demands From The Weakening Economy, Report Says

LONDON (Standard & Poor's) Aug. 24, 2009--In a global context, Standard & Poor's Ratings Services considers that the banking industry of the Republic of Belarus (foreign currency B+/Negative/B, local currency BB/Negative/B) represents very high risk, which is reflected in its Banking Industry Country Risk Assessment (BICRA), as noted in a report published today titled "Banking Industry Country Risk Assessment: Belarus," on RatingsDirect.

We have therefore placed Belarus in BICRA Group 9 (out of 10, 1 is the strongest). Other countries that are in the same group include Azerbaijan, Kazakhstan, Nigeria, Vietnam, and Costa Rica.

"The BICRA for Belarus reflects the very high economic and industry risks for its predominantly state-owned banking industry, which is adversely affected by tightening external liquidity, high corporate default probabilities, weakening household financial strength, and slow progress in privatization," said Standard & Poor's credit analyst Sergey Dementiev.

"These risks are partially mitigated, in our opinion, by the banking industry's limited dependence on foreign borrowings, government support coupled with the recapitalization of the four largest state-owned banks, the regulator's good track record in handling individual bank defaults, and improving financial disclosure," said Standard & Poor's credit analyst Ekaterina Trofimova.

The banking sector in Belarus is highly concentrated and dominated by the four state-owned banks, which jointly controlled 77% of the market at July 1, 2009. Corporate governance is a concern and competition between banks is limited, resulting in a lack of efficiency in the industry.

In our view, asset quality deterioration is the main risk in the recession. Reported nonperforming loans (NPLs; substandard, doubtful, and loss loans under local standards) stood at 2.7% of system loans at July 1, 2009. We believe that official NPLs are understated, because of the government's support to state-owned enterprises, masking their true underlying credit quality and production inefficiencies. We estimate that true gross problematic assets in Belarus would reach the range of 35%-50% under a reasonable--but not catastrophic--scenario of economic recession in the next two years, but we are unlikely to see official NPLs reaching these levels. In our opinion, systemwide capitalization and profitability--the regulatory total capital ratio stood at 19% and return on assets at 1.4% at July 1, 2009--would provide some buffer for the sector to absorb potential losses, but more new capital might be needed as the recession drags on.

As international capital markets remain closed for funding, Belarusian banks have to rely mostly on domestic resources, with state-related funding representing more than one-quarter of total system liabilities. Customer deposits (including government funds) accounted for 68% of system liabilities at July 1, 2009. Depositor confidence has not been shaken substantially, as banks experienced only moderate deposit outflow over the Belarusian ruble recent devaluation fears. In first-quarter 2009, reflective of the government support to banks, the share of the National Bank of the Republic of Belarus' funds in system liabilities stood at a high 10%, and the share of government-related entities' funds at 16%.

Under our criteria, we consider Belarus to be "interventionist" regarding its support for systemically important private sector banks. However, since no private sector domestically-owned bank would qualify for a systemically important status under our criteria, we would not incorporate any uplift in these ratings for potential government support.

Source:

http://www.cbonds.info/all/eng/news/index.phtml/params/id/441575

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