The AA(RU) credit rating of the Joint stock company Russian Agricultural Bank (hereinafter – the Russian Agricultural Bank, or the Bank) is based on its high systemic importance for the Russian economy and a very strong degree of state influence that it enjoys. On the other hand, the Bank features a moderately low standalone creditworthiness assessment (SCA) compared to peers working in the Russian Federation, which is due to its low IFRS capital adequacy indicators, a poor ability to generate capital, and a high proportion of problem loans that exert a significant negative pressure on the risk profile. That said, these drawbacks are partially compensated by a relatively strong business profile of the Bank.
The Russian Agricultural Bank is one of Russia’s largest credit institutions, faring 5th by assets and 4th by capital. It also stands third in terms of assets among state-owned banks and focuses on corporate lending, especially to the agricultural sector – the business line subsidized by the state and prioritized for the Bank, which is 100% owned by the Russian Government, with no privatization planned.
High probability of the government providing the Bank with extraordinary support. The Russian Agricultural Bank’s pivotal systemic importance (according to the ACRA Methodology for Analyzing Relationships Between Rated Entities and the State) is related to potential consequences of its default, which may lead to a systemic banking crisis and cause significant problems in select agricultural subsectors, as well as pose significant risks for the federal budget and social stability. A very high degree of state influence is reflected in the Russian government executing shareholder and operational control over the Bank, in the latter’s close involvement with state-run agricultural programs, as well as in multiple instances of the Bank obtaining state support since its inception, mainly through capital replenishment.
Moderately strong business profile. The Bank’s business profile assessment at “a-“ reflects its strong franchise and in particular its leading positions in lending to the agricultural sector and its overall importance for the Russian banking system. The strong franchise is supported by a well-developed regional network and customer loyalty, especially in the regions with a pronounced agricultural focus.
The Russian Agricultural Bank boasts a moderate degree of business diversification, reflected by the Herfindahl-Hirschman operating income diversification index standing at 0.26. The Bank has one of the most developed networks in Russia, comprising 73 regional branches, 1,047 additional offices and 178 operational offices.
The Bank’s current strategy till 2020 reflects government priorities in supporting agriculture and envisages a gradual business diversification into other sectors, which may bolster loan portfolio quality and help attain profitability in the medium term.
Capital adequacy is low, with Basel Tier-1 standing at 6.5% as of end-2016 versus 7.7% in 2015 and 9.9% in 2014. This decline in IFRS capital adequacy is related to substantial losses the Bank incurred over the last three years on the back of declining net interest margin and the significant provisioning for bad loans. By ACRA’s estimates, its averaged capital generation ratio (ACGR) amounted to -168 bps in 2012-2016. ACRA notes that impairment of loans provided to some of the largest borrowers may result in a necessity to form significant additional provisions and cause a further capital adequacy reduction. Under such scenario, the Bank may well face an SCA reduction, should the government opt out of recapitalizing it further.
Risk profile reflects a significant level of problem loans on the balance sheet. According to the Bank’s IFRS statements, overdue and/or impaired loans, including those on watch list, amounted to 20.5% of its loan portfolio as of January 1, 2017, which is much above the level of its Russian peers, including those with state ownership.
ACRA notes that recent years have seen a decline in the level of problem loans (22.9% in 2015, and 26.0% in 2014), which reflects write-offs and bad debt sales on the back of growing loan portfolio volume and diversification. However, the quality of new loans has yet to be confirmed in the coming years, especially given that the Bank keeps on providing loans to investment projects in agriculture and construction, the sectors prone to increased cyclical and seasonal risks.
Adequate liquidity and funding position is based on high volume of liquid and highly liquid assets that provide an adequate coverage of potential outflows (over the past six months, the short-term liquidity indicator has been consistently exceeding 90%). In case of necessity, the Bank has access to a significant volume of refinancing of the regulatory nature (REPO and 312-P transactions), as well as market-originated and the one provided by the state (including Federal Treasury funds).
The Bank’s funding structure is assessed as balanced, independent of regulator funding, and boasting low concentration on the largest creditors (the top 10 of the latter accounted for less than 1% of total liabilities as of end of December, 2016) and funding sources in general.
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
A negative rating action may be prompted by:
Standalone creditworthiness assessment (SCA): bb+.
Adjustments: two notches down against the Sovereign level.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and the State.
A credit rating has been assigned to JSC Russian Agricultural Bank for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (April 10, 2017).
Disclosure of deviations from the approved methodologies. Neither the short-term, nor the long-term liquidity shortage indicators (STLSI and LTLSI, respectively) were calculated in the course of rating assignment, as the assessment of JSC Russian Agricultural Bank’s liquidity position was based on its statements drawn up in compliance with Forms 0409122 and 0409125.
The assigned credit rating is based on the data provided by JSC Russian Agricultural Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC Russian Agricultural Bank and statements of JSC Russian Agricultural Bank composed in compliance with the Bank of Russia Ordinance No. 2332-U dated November 12, 2009. The credit rating is solicited, and JSC Russian Agricultural Bank participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC Russian Agricultural Bank in its financial statements have been discovered.
ACRA provided an additional service to JSC Russian Agricultural Bank in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.
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