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ACRA affirms А+(RU) to Bank “ROSSIYA”, outlook Stable

The credit rating assigned to Bank “ROSSIYA” (hereinafter, Bank “ROSSIYA”, or the Bank) stems from its relatively strong business profile with satisfactory capital adequacy, moderately low level of non-performing loans, and strong liquidity position. The standalone creditworthiness assessment (SCA) is under certain pressure from a high concentration of both assets and funding on the Bank’s largest clients. The Bank’s strong competitive advantage and highly probable support from its shareholders have a positive effect on the Bank’s rating.

Bank “ROSSIYA” is owned by a group of well-known Russian entrepreneurs, with Yury Kovalchuk as the largest shareholder controlling approximately 40% of the Bank’s stock. The Bank is one of the leading universal banks in Russia. Currently, the Bank operates exclusively in the internal financial market of Russia.

Key rating assessment factors

The Bank’s business profile (bbb+) reflects its strong position in the Russian banking system. Currently, the Bank ranks 15th by capital and 11th by assets among Russian credit institutions; the Bank has a recognizable brand. Its operating network includes 75 offices and branches, and is present in a number of large regions of Russia (the Bank’s business is somewhat concentrated in Moscow, St. Petersburg, and the Republic of Crimea).

The Bank’s business is moderately diversified: following 2017 results, the Herfindahl-Hirschman Index used by ACRA to assess operating income diversification stood at 0.33. ACRA assesses management quality as satisfactory in the context of the Russian banking sector. The Bank’s strategy suggests organic growth in lending activities and assets in the existing business lines. The Bank has a transparent ownership structure.

ACRA estimates the Bank’s capital adequacy as satisfactory. The Bank’s core capital ratio under RAS (N1.2) was 8.8% as of July 1, 2018, which is in line with capital adequacy targets the Bank has set. According to a stress test performed by ACRA, the Bank’s capital demonstrates strong capability to absorb credit risks on the 12 to 18-month horizon. According to ACRA’s estimates, the averaged capital generation ratio (ACGR) for 2013-2017 amounted to 56 bps, which reflects rather low profitability of the Bank’s business concentrated on corporate lending.

Operating efficiency of the Bank’s activities is supported by cost-to-income ratio that averaged 37% in 2015-2017 demonstrating stability of operating expenses amid volatile operating income of the Bank.

Satisfactory risk profile assessment reflects comparably low level of non-performing loans combined with relatively rapid growth in the Bank’s loan portfolio. According to the Bank’s IFRS statements, as of January 1, 2018, non-performing loans overdue for more than 90 days accounted for 5.4% in the total loan portfolio. ACRA also notes that the Bank’s balance sheet includes a certain amount of involuntarily restructured loans; however, it is not adversely affecting the Bank’s balance at present.

Relatively low concentration of loans in high-risk industries has a positive effect on the Bank’s risk profile: loans to construction and real estate companies accounted for only 6% in the Bank’s loan portfolio. The Bank’s securities portfolio is of good quality and well diversified. Market and operational risks are traditionally at acceptable levels and do not exceed core capital amount.

Funding and liquidity factor is assessed as adequate. This assessment is based on the Bank’s short-term liquidity surplus in both base case and stress scenarios as well as on its independence from regulatory funding. Long-term liquidity is marked by adequate coverage of liabilities by assets with corresponding maturities. The assessment of this factor is restrained by funding concentration on the corporate sector (about 81% of the Bank’s liabilities). The said funding structure is assumed to remain unchanged on the rating horizon.

ACRA applies an individual upward adjustment of SCA by 1 notch in order to highlight strong competitive advantage of the Bank arising from the sanctions regime imposed on the Bank by foreign states, which results in relatively more favorable conditions for its business activities in Russia.

The credit rating takes into account a high likelihood of support from the parent company. The Bank is not a member of any identifiable group; however, ACRA takes into account the probability of Bank’s support by shareholders and/or companies they own. According to the Methodology for Analyzing Member Company Relationships within Corporate Groups, ACRA assesses probability of such support as high, and therefore, adjusts SCA by 2 notches up.

Key assumptions

  • Cost of credit risk remains in the 2–3% range within the 12 to 18-month horizon;
  • Bank’s capital adequacy level (N1.2 ratio) equals or exceeds 8% 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:

  • Improved capital adequacy ratios, including by virtue of net income growth;
  • Decreased loan portfolio concentration on the largest borrowers, while preserving stably low level of non-performing loans;
  • Increased funding sources diversification.

A negative rating action may be prompted by:

  • Substantially increased share of non-performing loans in the loan portfolio;
  • Substantial decrease of capital adequacy ratios.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments:

  • Individual adjustment owing to strong competitive advantage: 1 notch up.
  • Shareholders’ support: 2 notches up.

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

A credit rating of Bank “ROSSIYA” was first published by ACRA on August 8, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the rating action (August 3, 2018).

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

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

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

Disclosure of deviations from the approved methodologies.  An upward adjustment is made in respect of assessment of funding concentration on the top 10 client groups as the said concentration is typical of end-year funding and does not correlate with the Bank’s long-term liability structure. The Bank’s SCA was adjusted by 2 notches up in order to give consideration to support by shareholders, which exceeds the maximum possible adjustment as set forth in the Methodology for Analyzing Member Company Relationship within Corporate Groups.

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