eximbank of russia · 12-152 12-142 12-132 12-122 2011 avg. total assets (rub billion) 47.1 14.7...

FINANCIAL INSTITUTIONS

CREDIT OPINION27 October 2016

Update

RATINGS

Eximbank of RussiaDomicile Russia

Long Term Debt Not Assigned

Type Not Assigned

Outlook Not Assigned

Long Term Deposit Ba2

Type LT Bank Deposits - FgnCurr

Outlook Negative

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Lev Dorf [email protected]

Yaroslav Sovgyra 7-495-228-6076Associate [email protected]

Eximbank of RussiaSemiannual update

Summary Rating RationaleWe assign long-term foreign and local-currency deposit ratings of Ba2 to Eximbank of Russia(Roseximbank), which are based on the bank's b2 baseline credit assessment (BCA) andits adjusted BCA of b2, and take into account our assessment of a very high probabilityof government support from the Russian government (Ba1 negative). We consider thatRoseximbank's ratings benefit from (1) the government's indirect 100% ownership of thebank via Russian Export Center (REC) which in turn is owned by Vnesheconombank ( Ba1negative, b3, VEB) and its importance for the Russian government as a specialised lender,supporting the export sectors of the Russian economy; (2) a track record of strong capital andliquidity support being extended to the bank from the Russian government.

Roseximbank's b2 BCA takes into account (1) the bank's still immature business model asthe government's conduit, intended to boost non-energy exports across a wide range ofRussian industries; (2) substantial, albeit rapidly decreasing, levels of problem loans, and highconcentrations in the loan portfolio, being diluted by new lending. More positively, the BCAalso reflects the bank's (1) strong capital buffer and (2) strengthening funding and liquiditypositions, which are supported by the government and VEB to further the bank's lendingactivities in export sectors.

Exhibit 1

Source: Moody's Financial Metrics

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1047806

MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 27 October 2016 Eximbank of Russia: Semiannual update

Credit Strengths

» Strong capital position will be supported by external capital injections and recovering profitability

» Strengthening funding and liquidity profile

» Very strong support to Roseximbank from the Russian government

Credit Challenges

» Immature business model and lack of business diversification

» Still material, albeit diluting, problem loans along with credit concentration

Rating OutlookThe outlook on Roseximbank's long-term deposit ratings is negative due to the negative outlook on the sovereign debt rating,reflecting also challenging operating environment in which the bank currently operates.

Factors that Could Lead to an Upgrade

» We consider that upward pressure on the long-term ratings of Roseximbank is limited in the next 12 months, unless there is apositive rating action on the sovereign ratings

Factors that Could Lead to a Downgrade

» Roseximbank's deposit ratings could be downgraded in the event of any negative rating action on the government ratings, as wellas our reassessment of the current probability of government support

Key Indicators

Exhibit 2

Eximbank of Russia (Consolidated Financials) [1]12-152 12-142 12-132 12-122 2011 Avg.

Total Assets (RUB billion) 47.1 14.7 11.9 9.4 - 70.93

Total Assets (USD billion) 0.6 0.2 0.4 0.3 - 27.83

Tangible Common Equity (RUB billion) 10.9 1 1.6 1.9 - 79.93

Tangible Common Equity (USD billion) 0.1 0 0 0.1 - 34.53

Problem Loans / Gross Loans (%) 20.1 36.2 31.9 4.4 - 23.14

Tangible Common Equity / Risk Weighted Assets (%) 46.1 8.2 15.4 19.5 - 22.35

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 30.6 98.3 112 13.3 - 63.54

Net Interest Margin (%) 2.5 2.1 3.5 3.5 - 2.94

PPI / Average RWA (%) 4 -0.4 0.3 -0.2 - 0.95

Net Income / Tangible Assets (%) -0.5 -15.7 -2.6 -0.8 - -4.94

Cost / Income Ratio (%) 56.2 109.4 93.8 104.6 - 914

Market Funds / Tangible Banking Assets (%) 55.8 70.3 66.1 59.1 - 62.84

Liquid Banking Assets / Tangible Banking Assets (%) 59.5 45.7 34.9 28.3 - 42.14

Gross loans / Due to customers (%) 280.3 547.5 810.8 1,344.1 - 745.74

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periodshave been used for average calculation [5] Basel I & IFRS reporting periods have been used for average calculationSource: Moody's Financial Metrics



Detailed Rating ConsiderationsSTRONG CAPITAL POSITION WILL REMAIN SUPPORTED BY THE GOVERNMENT

We expect Roseximbank’s capital position to remain strong over the next 12-18 months as it has been in recent year. Thanks to thecapital injections made by the government via VEB and EXIAR earlier in 2015, its Tier 1 and Total CAR ratios jumped to 48.7% and 59%at year-end 2015 from 12.7% and 21.7% respectively at year-end 2014 and remained strong at 36.9% and 44.5% respectively as at30 June 2016. We expect that the government will provide additional capital in case of needs to support new lending growth and tomaintain the bank's capital at healthy levels.

Our capital score of baa1 reflects our expectation that the bank's capital position will remain strong over the next 12-18 months

Exhibit 3

Capital ratios

Source: Moody's Financial Metrics, IFRS;

STABILIZING ASSET QUALITY HOWEVER THE LEVEL OF PROBLEM LOANS REMAINS MATERIAL

Roseximbank's development strategy envisages significant levels of new lending over the next three years, largely to selective Russiannon-commodity exporters in different sectors. A substantial part of new lending will be under EXIAR insurance (currently 19% of grossloans ) and guaranteed by the government (currently 43% of the gross loans), providing some comfort regarding the repayment ofpotential problem loans and we expect Roseximbank’s asset quality to remain stable over the next 12-18 months.

According to the bank, the level non-performing loans (NPLs) has significantly declined to around 13% of gross loans in 2015 from22.4% at year-end 2014 due to material increase in the loan book (120% in 2015) During the first six months in 2016 the lending wassubdued, but the absolute amount of NPL’s decreased, leading to a further reduction of NPL level to 11.95% of gross loans. The NPLsare fully covered by Loan Loss Reserves (LLR). A bulk of existing problem loans reflects NPLs inherited from the bank's previous lendingpolicies and are largely represented by a few loans provided to Russian enterprises in 2011-2013.

Additionally, the bank's loan book has been concentrated with the 10 largest borrowers ( net of LLR) for 100% of Tier 1 capital as of H12016. The anticipated substantial loan book growth will help to dilute the problem loans and reduce single-name concentration.

The majority of the bank's remaining assets comprise mainly cash and fixed-income securities of the Russian government and thelargest Russian corporate and banking borrowers.

Asset risk score of b3 reflects expected trend, potential rapid lending growth and credit concentration.



Exhibit 4

Asset quality indicators

Source: Moody's Financial Metrics, IFRS

RECOVERING PROFITABILITY FOLLOWING YEARS OF LOSS-MAKING PERFORMANCE

We expect Roseximbank’s to become profitable in 2016 and its profitability metrics to gradually improve over the next 12-18 months,supported by stabilizing asset quality and net interest margin. The bank posted a net profit of RUB482 million in H1 2016 up fromthe net profit of RUB129.4 million reported for H1 2015. For the whole 2015, the bank posted a net loss of RUB 225.5 million whichresulted from recognition and provisioning of the bank's abovementioned problem loans, while the bank's net interest margin improvedto 2.5% as of year-end 2015 from 2.1% posted in 2014.

At the same time, the bank's business model envisages only marginal profitability in the years to come, because the bank is largelyconsidered to be the government operative arm supporting export-oriented industries, rather than an income-generating commercialbank. The adjusted Profitability sub-factor in the scorecard is based on this scenario.

Profitability score of b1 reflects restored and strengthening profitability metrics.

STRENGTHENING FUNDING AND LIQUIDITY PROFILE

We anticipate Roseximbank's liquidity position to remain robust over the next 12-18 months as it has been in recent years, particularlygiven that the bank can rely on liquidity support from VEB and the Government. The bank has maintained a solid buffer of liquid assetsof around 59% as of end-June 2016. The liquidity cushion will partially be utilised to increase the loan portfolio until year-end 2016,

As of end-June 2016, the bank's funding base was largely comprised of 1) customer account -34%, 2) interbank loans - 26.5% and debtissued-15% of total liabilities. Going forward, the bank will increasingly rely on the government's stable funding provided directly, andindirectly via VEB and other budget sources, which is reflected in our Funding scorecard sub-factor adjustments. Additional financingwill be available via the Central Bank repo operations. The bank will also likely increase its local-currency denominated public debt.

Combined liquidity score of b1 reflects robust liquidity profile along with high reliance on wholesale funding.

Notching ConsiderationsGovernment SupportRoseximbank's global local-currency deposit rating of Ba2/Not Prime incorporates a very high probability of government support,which is based on (1) the Russian government's ultimate control over Roseximbank executed via EXIAR; (2) the bank's strategicimportance for the Russian government; and (3) a track record of the government's strong capital and funding support already providedto the bank in 2014-2015 .

Roseximbank was established in 1994 as the 100% subsidiary of the fully state-owned VEB and historically had only limited franchisewithin VEB Group, supporting a limited number of export and non-export contracts of Russian companies, including exports to less



developed countries such as Cuba, Angola, Ecuador. JSC Russian Export Center (REC), VEB subsidiary, currently executes control overthe bank via its subsidiary Export Insurance Agency of Russia (EXIAR).

The bank's model was significantly redesigned in 2014, following the Russian government's decision to strengthen governmentalsupport for non-energy export sectors. Roseximbank was included in the government's long-term export support program whichenvisaged the establishment of the Centre for Credit and Guarantee Support of Exports, which is based on VEB, REC, EXIAR andRoseximbank cooperation. In this role, Roseximbank will be considered as the key government-related lender to non-energy exportcompanies. The bank's activities will be concentrated in the following areas: (1) pre-export and post-export financing; (2) letters ofcredit; (3) structured and project funding; (4) factoring and leasing operations to support exports. We expect that Roseximbank will, incase of need, receive support directly from the Russian government, or via VEB and EXIAR. This support results in a multi-notch upliftfor Roseximbank's deposit rating from its BCA of b2.

On 28 November 2014, Vnesheconombank transferred 100% of the Bank’s shares (minus one share) to JSC Russian Agency for ExportCredit and Investment Insurance (EXIAR).

REC was established as a specialized organization offering a one-stop shop for exporters, providing financial and non-financial support,including cooperation with relevant ministries and agencies. The establishment of the Center was mandated by the Government of theRussian Federation, and the respective decision was made by the Supervisory Board of VEB on 13 April 2015. The Center was officiallyregistered as a 100% subsidiary of VEB on 21 April 2015.

Rating Methodology and Scorecard Factors

Exhibit 5

Eximbank of RussiaMacro FactorsWeighted Macro Profile Weak + 100%

Financial ProfileFactor Historic

RatioMacro

AdjustedScore

CreditTrend

Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 29.4% caa3 ↑ ↑ b3 Loan growth Single name

concentrationCapitalTCE / RWA 46.1% baa1 ← → baa1 Expected trend Access to capital

ProfitabilityNet Income / Tangible Assets -6.3% caa3 ↑ ↑ b1 Expected trend

Combined Solvency Score b2 ba2LiquidityFunding StructureMarket Funds / Tangible Banking Assets 55.8% caa1 ↑ ↑ b2 Expected trend Market funding quality

Liquid ResourcesLiquid Banking Assets / Tangible Banking Assets 59.5% baa2 ↓ ↓ ba2 Expected trend

Combined Liquidity Score b1 b1Financial Profile ba3

Business Diversification -1Opacity and Complexity 0Corporate Behavior 0

Total Qualitative Adjustments -1Sovereign or Affiliate constraint: Ba1Scorecard Calculated BCA range ba3-b2Assigned BCA b2



Affiliate Support notching 0Adjusted BCA b2

Instrument Class Loss GivenFailure notching

Additionalnotching

Preliminary RatingAssessment

GovernmentSupport notching

Local Currency rating ForeignCurrency

ratingCounterparty Risk Assessment 1 0 b1 (cr) 3 Ba1 (cr) --Deposits 0 0 b2 3 Ba2 Ba2Source: Moody's Financial Metrics

Ratings

Exhibit 6Category Moody's RatingEXIMBANK OF RUSSIA

Outlook NegativeBank Deposits Ba2/NPBaseline Credit Assessment b2Adjusted Baseline Credit Assessment b2Counterparty Risk Assessment Ba1(cr)/NP(cr)

PARENT: VNESHECONOMBANK

Outlook NegativeIssuer Rating Ba1ST Issuer Rating NP

Source: Moody's Investors Service



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REPORT NUMBER 1047806

eximbank of russia · 12-152 12-142 12-132 12-122 2011 avg. total assets (rub billion) 47.1 14.7...

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