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ACRA affirms BBB+(RU) to LOCKO-Bank, outlook Stable

The credit rating of LOCKO-Bank (hereinafter, the Bank, or LOCKO-Bank) is based on the Bank's satisfactory business profile, strong capital adequacy, satisfactory risk profile, and adequate funding and liquidity position. As compared to other rated entities, LOCKO-Bank has a moderate creditworthiness and a rather high vulnerability to adverse changes in the commercial, financial and economic environment in the Russian Federation.

LOCKO-Bank is a universal bank ranking 65th among the Russian credit institutions in terms of capital present in six federal districts of Russia (except the Far Eastern District) with the highest concentration in Moscow and in other million-plus cities. The principal lines of the Bank’s business include financing small and medium enterprises (currently, the focus is on contractual business customers) and retail lending (mainly, consumer and car loans) by primarily attracting funds of individuals into deposits and as part of private banking activities. Shareholding structure of the Bank is transparent including ultimate beneficiaries; 71.5% of shares are owned, directly or indirectly, by top managers and members of their families.

Key rating assessment factors

Satisfactory business profile. LOCKO-Bank’s strategy involves Bank’s transition to digital (i.e. with minimum number of offices) in order to increase its competitive advantage and operational efficiency. The scope of Bank’s business may increase by both organic growth and making M&A deals. Due to its universal profile, LOCKO-Bank is marked by highly diversified operating income (Herfindahl-Hirschman Index stands at 0.21); in the last five years, operating income dynamics was stable overall. Corporate governance quality is assessed as adequate and corresponds to the scope of the Bank's operations.

Substantial financial safety margin in terms of capital is based on high capital adequacy ratios under both IFRS (Tier-1 ratio stood at 19.9% as at March 31, 2018) and regulatory standards (N1.2 ratio was 15.2% as at July 01, 2018, while the minimum recommended level is 7.875%, including conservation buffer), which highlights the Bank’s ability to survive the increase in the cost of risk by more than 500 bps. LOCKO-Bank’s own capital generation ability is also assessed as very high (averaged capital generation ratio, CAGR, for the last five years has remained to 200 bps). At the same time, CTI (cost-to-income ratio) and NIM (net interest margin) figures that are indicative of the efficiency of Bank’s activities and calculated by ACRA for the last three years stood at 46% and 5.4%, respectively.

Satisfactory risk profile assessment of LOCKO-Bank is driven by the acceptable quality of the loan portfolio (55% of assets), while as of April 01, 2018, the share of problem loans was 10% of the portfolio, including 6.3% of NPL90+, 2.3% of restructured loans and 1.4% of potentially problem, in ACRA terms, loans (according to the loan portfolio analysis by top 30 groups of borrowers). At the same time, issued loans concentration on the largest borrower groups (top 10 account for 13.5% of the portfolio), high-risk industries (52% of the core capital) and affiliates (not more than 5% of the core capital) is assessed by ACRA as acceptable.

The quality of the securities portfolio (32% of the assets) largely comprising corporate bonds issued by high creditworthiness issuers, federal loan bonds and the Bank of Russia's bonds is assessed generally as high. At the same time, ACRA believes that the Bank's vulnerability to the market risk is still increased.

Strong liquidity position is based on the Bank’s ability to withstand an outflow of clients’ funds under both ACRA’s base case (short-term liquidity surplus is RUB 17 bln) and stress scenarios (8.9% of liabilities). At the same time, the average short-term liquidity indicator stands at 70% since early 2018. In case of need, the Bank can raise financing through repo transactions (as at March 31, 2018, 25% of the securities portfolio was encumbered). As to longer-term maturities, the Agency sees no imbalances (long-term liquidity shortage stood at 93% as at March 31, 2018).

Satisfactory funding profile. The share of the largest funding source (funds of individuals including wealth management clients and individual entrepreneurs) in the Bank’s liabilities is assessed as high at 69%; at the same time, we note no resource base concentration on the largest groups of borrowers (top 1 is 2.7% and top 10 is 12.1%). In the next 12 months, we expect no substantial outflow of funds. LOCKO-Bank raises no funding from the Bank of Russia.

Key assumptions

  • The Bank’s business model will not change within the 12 to 18-month horizon;
  • Net interest margin will be in the range of 5%-5.5%;
  • Tier-1 CAR will remain high within the 12 to 18-month horizon;
  • Current resource base structure will not change.

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:

  • Strengthening market positions while preserving a moderate risk appetite;
  • Significantly lower level of market risk;
  • Lower resource base concentration on the largest sources;
  • Improved operating efficiency.

A negative rating action may be prompted by:

  • Decreased core capital adequacy ratio under IFRS and/or RAS;
  • Higher share of non-performing loans in the loan portfolio;
  • Decline of liquidity position and higher resource base concentration on largest creditors.

Rating components

Stand-alone creditworthiness assessment (SCA): bbb+.

Adjustments: none.

Support: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was 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 assigned to LOCKO-Bank was first published August 16, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the rating action date (August 07, 2018).

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

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

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

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