ACRA Modelling Day - 2018

ACRA affirms AA(RU) of JSC Russian Agricultural Bank, outlook Stable, and affirms AA(RU) for its bonds

ACRA affirms the credit rating assigned to JSC Russian Agricultural Bank (hereinafter, Russian Agricultural Bank, or the Bank) at AA(RU), outlook Stable, and affirms AA(RU) for BO-02R, BO-03R, BO-04R, BO-05R bonds issued by the Bank.

The credit rating of Russian Agricultural Bank is based on its high systemic importance for the Russian economy and a very strong degree of state influence on the Bank.  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.  These drawbacks are partially compensated by a relatively strong business profile of the Bank and adequate funding and liquidity indicators.

The Russian Agricultural Bank is one of Russia’s largest credit institutions, faring 4th by assets and 4th by capital, and the third largest state-owned bank in terms of assets.The Bank focuses on corporate lending, especially to the agricultural sector – the business line subsidized by the state and prioritized for the Bank. Russian Agricultural Bank is 100% owned by the Russian Government, with no privatization planned.

Key rating assessment factors.

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. Business profile assessment of Russian Agricultural Bank at ‘a-’ reflects its strong franchise and in particular its leading positions in lending to the agricultural sector as well as in the Russian banking system overall.  The strong franchise is supported by a well-developed regional network and customer loyalty, especially in the regions with a pronounced agricultural focus. The Bank’s has one of the most developed networks in Russia, comprising 70 regional branches, 1011 additional offices and 218 operational offices. Russian Agricultural Bank boasts a medium operating income diversification.

The effective 2020 strategy of the Bank 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 capital standing at 6.8% as of end-2017 versus 6.5% in 2016 and 7.7% in 2015. ACRA notes that capital adequacy ratios are under pressure from substantial losses incurred by the Bank in the last three years as a result of the need to create substantial loan loss provisions.  By ACRA’s estimates, its averaged capital generation ratio (ACGR) amounted to -231 bps in 2013-2017. 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 making additional capital injections.

Risk profile reflects a significant level of problem loans in the Bank’s balance sheet: According to the Bank’s IFRS statements, overdue and/or impaired loans, including those on watch list, amounted to 17.9% of its total loan portfolio as of January 1, 2018. The above share of problem loans is still much above the level of its Russian peers including those with state ownership.

ACRA notes that the last two years have seen a decline in the level of problem loans (20.5% in 2016, and 22.9% in 2015), which reflects write-offs and bad debt sales on the back of some loan portfolio growth 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 sufficient coverage of potential outflows and high short-term liquidity ratios.  If it should be necessary, the Bank has an access to the considerable amount of regulatory (REPO and 312-P operations), market, and government (including by funds of the Federal Treasury) refinancing instruments.

The Bank’s funding structure is assessed as balanced, independent of regulator funding, and boasting low concentration on the largest creditors (the top 10 clients accounted for 28% of total liabilities as of end of December, 2017) and funding sources in general.

Key assumptions

  • Retaining the government's shareholder control over the Bank;
  • Cost of risk at around 3%;
  • Maintaining net interest margin at 2.5%-2.8%;
  • Tier-1 IFRS capital adequacy above at 6.5%-7% 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:

  • A an increase in the Bank’s systemic importance for the state and substantial expansion of its functions.

A negative rating action may be prompted by:

  • Loss of shareholding and operating control by the Russian Government as well as decrease of the Bank’s systemic importance.

Rating components

SCA: bb+.

Adjustments: on par with the Russian Federation minus 2 notches.

Issue ratings

JSC Russian Agricultural Bank, BO-02R (ISIN RU000A0JXUC1); redemption: June 21, 2021; issue volume: RUB 10 bln — AA(RU);

JSC Russian Agricultural Bank, BO-03R (ISIN RU000A0ZYBT9); redemption: September 28, 2021; issue volume: RUB 7 bln — AA(RU);

JSC Russian Agricultural Bank, BO-04R (ISIN RU000A0ZYJ42); redemption: December 9, 2020; issue volume: RUB 5 bln — AA(RU);

JSC Russian Agricultural Bank, BO-05R (ISIN RU000A0ZYXJ4); redemption: March 9, 2022; issue volume: RUB 25 bln — AA(RU);

Rationale. The above listed issues represent senior unsecured debt of JSC Russian Agricultural Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to the ACRA methodology, the credit rating of the issue is equivalent to that of JSC Russian Agricultural Bank — AA(RU).

Regulatory disclosure

The credit ratings have been assigned to JSC Russian Agricultural Bank and to bonds (ISIN RU000A0JXUC1, ISIN RU000A0ZYBT9, ISIN RU000A0ZYJ42, ISIN RU000A0ZYXJ4) issued by JSC Russian Agricultural Bank 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 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. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the process of credit rating assignment.

For the first time, the credit rating of JSC Russian Agricultural Bank and credit ratings of bonds (ISIN RU000A0JXUC1, ISIN RU000A0ZYBT9, ISIN RU000A0ZYJ42, ISIN RU000A0ZYXJ4) issued by JSC Russian Agricultural Bank were published by ACRA on April 11, 2017, June 28, 2017, October 6, 2017, December 8, 2017, and March 21, 2018, respectively. The credit rating of JSC Russian Agricultural Bank and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the rating action date (April 10, 2018).

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. 4212-U dated November 24, 2016. 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 additional services to JSC Russian Agricultural Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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