Training on AMC and NSPF, September 6–7

ACRA assigns BB+(RU) to Bank SOYUZ, outlook Stable

The credit rating assigned to Bank SOYUZ (hereinafter, SOYUZ, or the Bank) stems from fairly high likelihood of financial support from its parent entity, “Ingosstrakh Insurance Company” (hereinafter, the Supporting Institution, or SI), if needed, and moderately low financial profile of the Bank. SOYUZ’s standalone creditworthiness (SCA) is based on satisfactory business profile assessment, weak capital position and critical risk profile assessment on the back of adequate funding and liquidity position. The Bank’s creditworthiness is stable in the short term; however, high sensitivity to adverse changes in the commercial, financial, and economic conditions in the Russian Federation.

Bank SOYUZ is a universal bank holding medium positions (ranking 80 in terms of capital) in the Russian banking sector, with 95.9% of its shares controlled by the Supporting Institution. The Bank is present in six federal districts of Russia (with the highest concentration of the corporate segment in Moscow, while its retail business is geographically diversified). The primary activity is lending to both corporate (mainly medium-size business) and individual clients (mostly mortgage and car loans) in virtually equal proportion, factoring services as well as transactional banking related to, among other things, the SI (payment and cash services, issuance of guarantees and sale of insurance products).

Key rating assessment factors

Fairly high likelihood of extraordinary support from the shareholder. The Supporting Institution has high creditworthiness assessment and, in ACRA’s opinion, is willing to provide SOYUZ with sufficient long-term and short-term financing, if needed, as well as inject capital, considering:

  • The degree of legal affiliation between the SI and the Bank and the SI’s ability to exercise control over its operating activities;
  • Financial aid provided by the SI to SOYUZ in form of non-repayable funds that totaled RUB 1.9 bln in 2015 and RUB 2.4 bln in 2016, which was recorded in the Additional Tier-1 capital;
  • Potential reputational risks for the SI if SOYUZ defaults.

In view of the above, the Agency assesses the degree of relationships between the Supporting Institution and the Bank as moderate. ACRA’s opinion with regard to the extent of support from the SI is reflected in two notches added to the Bank’s SCA (bb-).

Satisfactory business profile. The strategy of SOYUZ incorporates improvement of operational efficiency by virtue of optimizing business processes within the bank by way of centralization of some functions, which would drive the costs for maintaining the branch network lower, and improvement of existing IT systems in order to increase the speed of decision-making and servicing the clients. High diversification of the operating income (the Herfindahl-Hirschman Index equaled 0.19 as at September 30, 2017) based on the universal nature of the Bank’s activities demonstrated overall positive dynamics over the last five years. The corporate governance quality is in line with the scope of SOYUZ’s activities and is closely monitored by the management, and therefore, is assessed as satisfactory.

Weak capital position is primarily determined by very low capacity of the Bank to generate capital (the averaged capital generation ratio, ACGR, is negative over the last five years), which was driven by unprofitable activities in 2015-2016 resulting from substantial additional provisioning of the loan portfolio. Also, the operating efficiency of SOYUZ is still below the average among its peers: CTI (cost-to-income) and NIM (net interest margin) ACRA calculates for the last three years stand at 88% and 4%, respectively. At the same time, the Bank complies with statutory capital adequacy ratios with a margin: as at November 1, 2017, N1.2 ratio equaled 10.5% and N1.0 was at 14.7%, while the minimum recommended figures are 7.25% and 9.25% (including the conservation buffer), respectively, which allows the Bank withstanding a moderate increase in the cost of risk in a stress scenario (above 400 bps) while staying compliant with statutory ratios.

Critical risk profile assessment of SOYUZ is determined by a high share of problem and potentially problem loans in the loan portfolio: around 20% (including NPL90+ totaling 7.7% of the portfolio, forcedly restructured loans accounting for 11.3%, and potentially problem loans (in ACRA’s opinion) taking up 1% of the portfolio). At the same time, the provisioning ratio with respect to problem and potentially problem loans is low at 44%. The share of loans and other claims (guarantees) to companies affiliated with business of principle beneficial owners of the Bank may, in ACRA’s opinion, be as high as 75% of the core capital; at the same time the coverage of loan claims exceeds 100%. At the same time, the portfolio concentration on the top ten groups of borrowers is assessed as acceptable (25.3% of the portfolio) and concentration on high-risk industries is assessed as moderate (66% of the core capital).

Investments into securities of SOYUZ account for around 25% of assets, with Russian government bonds and bonds of the Bank of Russia having a significant share in the securities portfolio (64% of investments).

In addition, SOYUZ has a number of non-core assets (around 45% of core capital), 35% of which are represented by property collected from defaulted borrowers, and 10% are investments into equity instruments. The liquidity of these assets is assessed as limited.

Adequate liquidity and funding profile. The Bank is capable of withstanding a significant outflow of client funds in both base case (short-term liquidity surplus exceeds RUB 25 bln) and stress scenarios (16% of liabilities). At the same time, the average short-term liquidity indicator (STLI) in 2017 exceeded the minimum 80% by far. If necessary, Bank SOYUZ can also raise additional funds as part of repo transactions by virtue of low share (18%) of encumbered securities in its portfolio. We also observe no liquidity imbalances on the longer-term horizon (the long-term liquidity shortage indicator, LTLSI, was above 100% as at September 20, 2017).

The diversification of the Bank’s funding sources is assessed as acceptable: funds of legal entities account for 46% and those of individuals for 38% of total liabilities. Resource base concentration on creditors is high (the largest group’s share is 18.9%, and top ten groups account for 42.8%)., while the share of funds from related parties, including those regarded as such by ACRA, is around a quarter of total liabilities. In the next 12 months, no significant outflow of funds is expected. As at September 30, 2017, the Bank had no funds raised from the Bank of Russia, and funds raised from the Federal Treasury accounted for 2.6% of total liabilities.

Key assumptions

  • The Bank’s business model will remain unchanged within the 12 to 18-month horizon;
  • NIM is maintained around 3%-4%;
  • Maintaining a relatively high core capital adequacy (N1.2) 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:

  • Bank’s activities generating sustainable profits, while dividend payout is minimal;
  • A substantially reduced share of problem loans and concentration of the loan portfolio on the largest borrowers;
  • A significant decline in non-core assets on the Bank’s balance sheet;
  • Higher resource base diversification in terms of creditors.

A negative rating action may be prompted by:

  • Increase in lending to the Bank’s direct or indirect affiliates;
  • Worsening liquidity position.

Rating components

SCA: bb-.

Adjustments: no

Support: 2 notches up to SCA.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Methodology for Analyzing Member Company Relationships Within Corporate Groups as well as the Key Concepts Used by The Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating has been assigned to Bank SOYUZ for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (December 28, 2017).

The credit rating is based on the data provided by Bank SOYUZ, information from publicly available sources, and ACRA’s own databases. The rating analysis is based on the IFRS consolidated statements of Bank SOYUZ and financial statements of Bank SOYUZ composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and Bank SOYUZ participated in its assignment.

No material discrepancies between the data provided and the data officially disclosed by Bank SOYUZ in its financial statements have been discovered.

ACRA provided no additional services to Bank SOYUZ. No conflicts of interest were discovered in the course of credit rating assignment.

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