ACRA affirms BB+(RU) to LLC CBED «THE BANK OF KAZAN», changes outlook to Stable

The credit rating outlook of LLC CBED «THE BANK OF KAZAN» (hereinafter, the Bank) has been changed from Negative to Stable to reflect ACRA’s opinion on the absence of clear signs of a significant worsening in the quality of the Bank’s loan and guarantee portfolios over the past 12 months, as well as the Agency’s baseline expectation that as economic activity recovers over the next 12–18 months, the potential pressure on the Bank’s capital will weaken.

The credit rating of the Bank is currently based on the satisfactory business profile, adequate capital adequacy, weak risk profile, and adequate assessment of funding and liquidity.

The Bank is a small credit institution operating primarily in the Republic of Tatarstan (ACRA rating: AAA(RU), outlook Stable, hereinafter, Tatarstan). As of March 1, 2021, the Bank ranked 171st by equity and 172nd by assets in the Russian banking sector. The key shareholder of the Bank is Oskar Prokopiev, whose share is about 60%. The remaining share is held by MPI “Committee on Land and Property Relations of Kazan”.

Key rating assessment factors

The satisfactory business profile assessment (bb+) stems from the small market share held by the Bank in the Russian banking sector in general, and in Tatarstan in particular, as well as the still quite concentrated nature of its activities (as of February 1, 2021, the 30 largest principals and 30 largest borrowers accounted for about 53% and 48% of the respective portfolios). Besides corporate banking, guarantee issuance continues to be the Bank’s major business line, which contributes to higher diversification of its operations. ACRA also notes a certain geographic diversification of the guarantee portfolio: regions other than Tatarstan account for almost half of the issued guarantees. However, strong competition in this business segment will continue to constrain the Bank’s revenue.

This year, the Bank plans to resume active work in lending, which was interrupted in 2020 due to the challenging external environment. ACRA positively assesses the pro-cyclical nature of the Bank’s development, which points to the prudent approach of its management to risk taking. The main growth is expected in retail lending (around 20% of the portfolio as of February 1, 2021), including the segment of consumer lending to borrowers who are employed by state and municipal bodies, as well as to employees of Tatarstan’s major enterprises. The fact that MPI “Committee on Land and Property Relations of Kazan” is among the Bank’s owners will be an important factor contributing to the realization of these plans.

The capital adequacy and profitability assessment is adequate. Under the base case scenario, the Agency expects the capital adequacy (N1.2) ratio to amount to around 10.5–11% over the next 12–18 months. Despite the relatively low profitability of the Bank’s operations and its plans to pay half of net profit as dividends, ACRA assumes that it is able to withstand an increase in the cost of risk by more than 500 bps compared  to the base case scenario (this indicator is around 100 bps for 2021 as per baseline expectations) without violating the N1.2 ratio. Relatively good results are supported by a fairly high level of loan portfolio coverage by reserves (in accordance with local regulation) and ACRA’s more favorable opinion than a year ago on the quality of the guarantee portfolio, which significantly reduces the pressure on capital ratios.

Over the past five years, the Bank’s averaged capital generation ratio (ACGR) has amounted to around 45–50 bps, which includes the weak metrics recorded in 2020, and corresponds to a satisfactory level. A relatively low operational efficiency continues to put pressure on the Bank’s profitability: according to ACRA’s estimates, the three-year averaged CTI is close to the critical level and amounts to 73%.

The weak risk profile is due to problem loans in the Bank’s loan portfolio at around 15–17% of the total lending according to the Agency’s assessments. This share is unchanged compared to the assessment made by ACRA when the issuer’s credit rating was reviewed last year. In addition, the Agency will monitor possible growth of unsecured exposures over the next 12–18 months (as of  February 1, 2021, unsecured loans accounted for about 54% of overall portfolio, while the threshold value according to ACRA’s methodology is 60%).

As previously noted, the ratio of the Bank’s problem guarantees to the total portfolio is low. Nevertheless, a significant number of principals operate in construction, services, and trade (each sector accounts for approximately 21% of the portfolio), and the share of express guarantees accounts for around a third of the portfolio. In the Agency’s opinion, the abovementioned types may be the most vulnerable in the event of a recurrent slowdown in business activity (which is not ACRA’s base case scenario).

Adequate funding and liquidity position. The Bank continues to maintain a sufficient liquidity buffer, while its funding comes mainly from deposits (dominated by retail customers), and the Agency assesses it as relatively stable. As of February 1, 2021, the short-term liquidity shortage indicator was positive in both the base case and the stress scenarios of ACRA. The long-term liquidity shortage indicator was 97%.

Key assumptions

  • Adhering to the current business model over the next 12 to 18 months;
  • Maintaining N1.2 above 9%;
  • The Bank’s capacity to withstand growth in the cost of risk of no lower than 500 bps above the base case scenario without violating the N1.2 ratio;
  • Maintaining three-year averaged CTI at no higher than 75%;
  • No significant growth of the loan portfolio;
  • Strong liquidity indicators.

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:

  • Sustained significant decrease in the volume of problem loans;
  • Significant and sustained growth in capitalization and profitability indicators.

A negative rating action may be prompted by:

  • Consistent growth in three-year averaged CTI to over 75%;
  • Growth of potentially problem assets and off-balance sheet credit commitments, which may trigger material credit losses and result in the N1.2 ratio falling below 9% and/or worsening of ACRA’s capital stress test results;
  • Sustained growth of the share of unsecured loans to more than 60% of the loan portfolio.

Rating components

SCA: bb+.

Adjustments: none.

Support: none.

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

The credit rating of LLC CBED «THE BANK OF KAZAN» was published by ACRA for the first time on May 11, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by LLC CBED «THE BANK OF KAZAN», information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of LLC CBED «THE BANK OF KAZAN» and the statements of LLC CBED «THE BANK OF KAZAN» drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and LLC CBED «THE BANK OF KAZAN» participated in its assignment.

In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

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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