OREANDA-NEWS. RusRating has lowered M Bank's credit rating from "A-" to "BBB-" on the national scale and from "BB+" to "BB-" on the international scale, in both cases with a negative outlook.

According to the agency, the rating cut and change in outlook reflect an increase in reputation and regulatory risks coupled with negative public reports about the entire banking group. M Bank's ratings are also under pressure from increased risks to liquidity due to the larger role played by retail deposits and reduced scope for re-allocating liquidity across the group. There are also grounds for concern about client loans, which centre on unsecured financing for investment projects and are not (in RusRating's view) adequately covered by loan provisions. In addition the Bank's return on core operations is low as costly retail deposits are the main source of financing for asset-side operations.

RusRating has also placed M Bank on its watch list, which means that further revisions to the ratings or rating outlooks (both favourable and unfavourable) are possible, depending on what additional information is provided by the Bank or emerges in public sources.

The rating itself is based on the Bank's current market positions and an anticipated merger with Bank Rossiiski Kredit.

Constraining factors include a lack of transparency with respect to the Bank's beneficiary owners, a business that remains more than usually concentrated by individual client, the use of retail deposits to finance primarily long-term investment projects, and uncertain prospects for shareholder support.

M Bank is a mid-sized Moscow credit organisation and a former construction industry specialist. Up until June 2013 a controlling interest was held by finance and construction companies owned by former BIN group affiliates, which in March 2012 bought out a minority stake from the municipal authorities as the city disposed of non-profile assets; all shares have since changed hands and are now controlled by five private individuals, who may act as unofficial representatives of a single investor. Early in 2012 the Bank adopted a new development strategy focused on retail and SME services, mainly aimed at clients in Moscow and the surrounding region. Since that time it has actively expanded its service network and reports noticeable growth in market positions, particularly in personal deposits. In June 2014 M Bank's Supervisory Board approved a merger with Bank Rossiiski Kredit, which is scheduled for completion next year.

Capital is minimally adequate and its quality is judged healthy. External funding draws mainly on retail deposits, whose growth has significantly outpaced other categories since 2012. Balance sheet measures of asset quality are satisfactory but credit risks are potentially high. Returns on core operations are low. Overall risk sensitivity is high. Liquidity is sufficient.