ACRA affirms A+(RU) to JSC “OTP Bank”, outlook Stable

ACRA has affirmed the credit rating of JSC “OTP Bank” (hereinafter, the Bank) based on the Bank’s improved funding position and decreased capital position, as well as other factors remaining unchanged in its financial stability assessment. The Bank’s rating is based on a moderately high standalone creditworthiness assessment (SCA) in view of an adequate capital adequacy position, satisfactory risk profile assessment, adequate liquidity and funding position, and adequate business profile. The credit rating is supported by the possibility of extraordinary support from the Bank’s parent bank, which boasts relatively high creditworthiness.

The Bank is a credit institution ranking 48th in assets and 37th in capital among Russian banks. Almost 100% of the Bank’s shares are owned directly or through a subsidiary by OTP Bank Plc., the principle company of OTP Group (hereinafter, the Supporting Organization, or the SO) – a large financial services provider operating in Central, Southern, and Eastern Europe.

Key rating assessment factors

High probability of extraordinary support from the SO. In ACRA’s opinion, the SO can provide the Bank with sufficient short-term and long-term financing as well as capital injections if necessary. The final country risk assessment of the presence jurisdiction of the foreign supporting organization (Central, Southern, and Eastern Europe, with Hungary accounting for around 40% of the SO’s total assets) is determined as moderately strong compared to the country risk of the Russian Federation. ACRA determines the SO’s creditworthiness as moderately strong.

ACRA assesses the degree of integration between the Bank and the SO as strong based on the following:

  • The business of OTP Group in Russia accounts for around 14% of its total revenues and contributes 16% of its net interest income;
  • The SO determines the Bank’s development strategy;
  • The SO is involved in the development and implementation of the Bank’s risk assessment and risk management procedures;
  • A number of the SO’s representatives are members of the Bank’s board of directors.

ACRA believes that the Bank's business profile (bbb+) is adequate given its direction of development. The Bank has maintained its main areas of development, which are aimed at consumer lending, primarily in the POS loan and credit card segments. ACRA notes a slowdown in the growth of the loan portfolio in 2018 and 2019, which has pushed the Bank to develop related activities. ACRA believes that the Bank’s management system contributes to the implementation of its strategy. Diversification of operating income remains high due to a significant share of commission revenues (31.1%). ACRA also notes the Bank’s plans to develop new business lines such as car loans, which will also help improve diversification.

ACRA notes the Bank’s decreased level of capital adequacy. N1.2 had decreased below 12% as of December 1, 2019. The Bank also plans further reduction of capital in relation to RWA. These factors, combined with a declining NIM (average for the last three years was 12.2%) and limited efficiency (CTI 62.0%), put pressure on the final capital assessment. In addition, ACRA notes the negative impact of losses in 2015 on the average capital generation ratio (ACGR 45 bps).

ACRA maintains its satisfactory assessment of the Bank’s risk profile. The share of problem loans under IFRS (Stage 3) stood at 14.8% at the end of June 2019. The relatively high share of problem loans is explained by the Bank’s active practice of collecting overdue consumer debt via court proceedings. In addition, ACRA notes a high level of reserves for potential losses (reserves for Stage 3 loans amounted to 92%).

The Bank’s retail profile allows it to maintain a high level of portfolio granularity. The share of loans issued to the ten largest borrowers amounts to 6.4% of all loans, but leads to low security (the share of unsecured loans is 93%).

The Bank maintains a sufficient amount of liquid and highly liquid assets to repay obligations with a maturity of up to 90 days. In ACRA’s base case scenario, the short-term liquidity shortage indicator shows that the Bank has a liquidity cushion of around RUB 25.4 bln. ACRA’s stress test indicates an excess of 4% of liabilities. Considering that the Bank’s long-term liquidity shortage indicator stands at 58%, ACRA assesses the Bank’s liquidity position as adequate.

ACRA notes the Bank’s improved funding and low dependence on funds from its largest creditors in view of the retail nature of the Bank’s business. At the same time, the share of funds of consumer depositors exceeds 60% of the total funding base, and the share of consumer current accounts is 17% of total deposits. Additionally, the Bank can attract funding from its parent Bank in rubles.

Key assumptions

  • Maintaining the current development model;
  • Maintaining shareholder and operational control from OTP Bank Plc (OTP Group).

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:

  • Significantly improved position in Russian’s financial services market;
  • Further decrease in the concentration of funds from the largest depositors;
  • Improved capital position.

A negative rating action may be prompted by:

  • Substantial decrease in loan portfolio quality;
  • Decreased interest on the part of the SO in developing business in Russia;
  • Substantial deterioration in the SO’s financial condition.

Rating components

SCA: a-.

Adjustments: none.

Support: SCA +2.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating assigned to JSC “OTP Bank” was published by ACRA for the first time on March 2, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned credit rating is based on the data provided by JSC “OTP Bank,” information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS statements of JSC “OTP Bank” and the financial statements of JSC “OTP Bank” drawn up in compliance with Bank of Russia Ordinance № 4927-U, dated October 8, 2018. The credit rating is solicited, and JSC “OTP Bank” participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by JSC “OTP Bank” in its financial statements have been discovered.

ACRA provided additional services to JSC “OTP Bank.” No conflicts of interest were discovered in the course of credit rating assignment.

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