ACRA Trainings on Credit Analysis

ACRA assigns BB-(RU) to LLC CBED «THE BANK OF KAZAN,» outlook Stable

The credit rating of LLC CBED «THE BANK OF KAZAN» (hereinafter – the Bank of Kazan, or the Bank) is based on its weak market position, satisfactory risk profile, adequate liquidity and funding position, and critical capital adequacy position. The Bank boasts sustainable creditworthiness in the short term, although ACRA believes that it may grow highly sensitive to adverse economic and sector-specific conditions in Russia as a whole and the Republic of Tatarstan in particular.

The Bank of Kazan operates mainly in Tatarstan focusing on corporate lending and guarantee provision. Its shareholders are the MPI “Committee on land and property relations of Kazan” (49.12%) and OOO “Leasing-Trade” (50.88%), with the latter’s ultimate beneficiary being Oskar Prokopiev (99.86%).

Key rating assessment factors

Relatively weak business profile assessment of the Bank is mainly determined by its small market share on the federal and regional levels. The Bank of Kazan ranks 191st by capital in Russia and 7th by assets in Tatarstan. Its strategy targets an increase in business scale while maintaining core development priorities, with an option of expanding beyond the regional focus for certain business lines. The Agency assesses corporate governance quality at the Bank as satisfactory. Although the current ownership structure is transparent, it is prone, in ACRA’s opinion, to creating conflicts of interest between shareholders. The Agency also points to moderate operating income diversification of the Bank and notes that the assessment of this factor is capped its purely regional focus.

Low ability to absorb potential losses is premised upon the values of regulatory indicators of the Bank of Kazan, with N1.2 equaling 7% as of April 1, 2017. The Agency relates this to the Bank’s policy targeting maximum utilization of own funds. That said, the Bank has been consistently profitable on the operating level over the last five years (averaged capital generation ratio, ACGR, = 108 bps), which is due to its relatively high interest margin (2016 NIM = 6.6%) and low cost of credit risk. ACRA assumes that the Bank cannot withstand an increase in the cost of risk by more than 300 bps without N1.2 declining below 6% and will need additional capital injections to avoid this decline. Although shareholders do consider a possibility of recapitalizing the Bank, there is still uncertainty around its dividend policy. ACRA believes that, adhering to its current strategy, the Bank will most likely continue to see its capital adequacy at a low level.

Satisfactory risk profile assessment is supported by an adequate risk management system and an acceptable loan portfolio quality, on the one hand, and a rapid loan portfolio growth coupled with a high proportion of the portfolio made up by loans to borrowers focusing on construction and real estate, on the other hand. The share of bad debt does not exceed 5% of the portfolio (including NPL90+ — 1,5%).

The risk profile assessment is marred by the high proportion of loans for financing construction and real estate transactions, the activities that the Agency believes to be prone to high risk. The total of outstanding loans in this category exceeds 200% of own capital. According to ACRA, another negative factor for the Bank’s creditworthiness assessment is the rapid loan portfolio growth (by some 100% by end-2016).

In ACRA’s opinion, risk management quality at the Bank of Kazan may be regarded as adequate. The Agency notes the management’s ability to maintain a moderately conservative financial profile of the Bank, despite its rapid growth and regional focus. However, loan portfolio’s resilience to cyclical economic downturns (with considerable sector concentration accounted for) remains questionable and may result in additional loan losses in the medium term.

Adequate liquidity and funding position is mainly related to the Bank’s strong liquidity position. By Agency’s estimates, the Bank enjoys short-term liquidity surplus under the base case scenario for calculation of the short-term liquidity shortage indicator (STLSI). Under the stress scenario this indicator should not fall below minus 5%. That said, ACRA sees no imbalances in the longer term, with the long-term liquidity shortage indicator (LTLSI) exceeding 80%.

The Bank of Kazan boasts a securities portfolio made up primarily by high quality instruments and not encumbered with repo transactions. Therefore, it can be used to raise additional liquidity.

According to the Agency, the Bank’s funding structure is balanced, with funding primarily sourced from individuals and private entrepreneurs, whose share accounted for nearly 50% of all liabilities as of December 31, 2016. The Bank does not resort to regulator funding. ACRA also notes an acceptable level of concentration on the largest creditors/depositors.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Loan portfolio growth rates not lower than the sector average in 2017 (10-13%);
  • Cost of credit risk within 2%;
  • Retaining operating profitability;
  • Capital adequacy (N1.2) above 6% within the 12 to 18-month horizon.

Potential outlook or rating change factors

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:

  • An increase in capital adequacy;
  • A decline in the proportion of loans provided to construction and real estate companies.
  • A decline in the share of 10 largest borrowers in the loan portfolio.

A negative rating action may be prompted by:

  • A drop in loan portfolio quality;
  • A conflict of interest between shareholders.

Rating components

Standalone creditworthiness assessment (SCA): bb-.

Adjustments: none.

Support: systemic importance is absent.

Issue ratings

The Bank has no debt securities in free float.

Regulatory disclosure

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 and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to LLC CBED «THE BANK OF KAZAN» for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (May 5, 2017).

The assigned credit rating is based on the data provided by LLC CBED «THE BANK OF KAZAN», information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of LLC CBED «THE BANK OF KAZAN» and statements of LLC CBED «THE BANK OF KAZAN» composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and LLC CBED «THE BANK OF KAZAN» participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by LLC CBED «THE BANK OF KAZAN» in its financial statements have been discovered.

ACRA provided no additional services to LLC CBED «THE BANK OF KAZAN». No conflicts of interest were discovered in the course of credit rating assignment.

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