Forecasting in credit analysis, May 14–15

ACRA affirms BBB+(RU) to Sviaz-Bank, outlook Developing

The credit rating of Sviaz-Bank (hereinafter, the Bank) is based on a high probability of extraordinary support from its shareholder (State Development Corporation “VEB.RF”, hereinafter, VEB.RF, (AAA(RU), outlook Stable), the Supporting Institution, the SI).  The Bank is marked by a relatively low standalone creditworthiness assessment (SCA), which is down to an adequate business profile and funding and liquidity position, as well as a satisfactory capital adequacy position. The critical risk profile assessment is a negative factor for the Bank’s rating.

The assignment of the Developing outlook (it was previously the “Rating under revision: developing” status) reflects ACRA’s opinion about lingering uncertainty about the Bank’s ownership structure, future business model, and long-term development strategy.

The Bank is a universal bank with the vast federal network and developed franchise in corporate and retail segments. The process of the Bank’s restructuring through the merger with GLOBEXBANK was completed in late November 2018. As of early December 2018, the merged bank ranked 23rd in terms of own capital nationwide. VEB.RF currently retains its control over the Bank.

Key rating assessment factors

High likelihood of extraordinary support from the SI. The strategy of VEB.RF (adopted in December 2016) defines the Bank as a non-core asset with its sale having been scheduled to take place in 2020. However, the change of the Bank’s ownership is likely as early as on the 12-month horizon considering reports that VEB.RF may transfer the Bank to the balance sheet of Promsvyazbank PJSC (AA-(RU), outlook Stable)

Given the (1) existing significant support (placement of funds by the VEB.RF Group, and capital replenishment at end-2016); (2) existing unconditional credit lines aimed at supporting the Bank’s liquidity; (3) pronounced operating control; (4) serious reputational risks for VEB.RF in case of the Bank’s default, ACRA believes that VEB.RF is ready to provide the Bank with sufficient financing and replenish its capital should the need arise at least until the loss of ownership of it. Taking into account the above-mentioned facts, the Bank’s SCA (bb) gets four additional notches of support.

Satisfactory business profile. The Bank is currently a universal bank with rather good market positions in lending to medium and large businesses, a large retail customer base, and a rather strong mortgage franchise. In the absence of an explicit development strategy of the Bank, its management is focused on improving the Bank’s operating efficiency, optimizing spending, completing the procedures related to the merger with GLOBEXBANK, as well as working with troubled debt and non-core assets. The Bank’s operating income is characterized by an acceptable diversification without an apparent anchor source.

Significant loss absorption buffer, but no capability for capital generation. The Bank has a high core capital adequacy ratio (N1.2 totaled 14.39% in early December, 2018, with the minimum permissible level of 6%), which hasn’t changed considerably since the merger with GLOBEXBANK. This enables the Bank to withstand a significant (over 500 bps) increase in the cost of credit risk without breaching the minimum established core capital adequacy levels. At the same time, the merged bank’s own capabilities to generate new capital are assessed as very weak: due to the previous losses (incurred because of reserves for problem assets) the average capital generation ratio (ACGR) for 2014-2018 was below zero. The Bank’s operating efficiency has been extremely low in the last three years (the average cost-to-income ratio stood at around 100%, while net interest margin (NIM) was 3.3%).

The Bank’s risk profile has been downgraded to critical due to the transfer of GLOBEXBANK’s problem assets (including non-core ones) to its balance sheet. The quality of the Bank’s loan portfolio is assessed as low (according to ACRA estimates, the share of problem and potentially problem loans exceeded 23% in the Bank's loan portfolio at the end of 2018, including the NPL90+ share of over 18.4% in the loan portfolio). As a positive sign, the Agency notes that both the Bank and GLOBEXBANK (prior to the merger) carried out work related to reserves for problem loans and other assets (at the end of 2018, the level of coverage of problem and potentially problem loans with reserves stood at roughly 84%).  

Significant investments in non-core assets (at least 49% of core capital), represented by shares of closed-end investment funds, which the Bank had received from GLOBEXBANK, as well as the property received as compensation, has a negative impact on the Bank's risk profile assessment.  

The Bank's market risk is assessed as moderate due to a rather high quality of its bond portfolio (mainly OFZ bonds and corporate first-echelon issuer bonds). The Bank’s operational risk is assessed as low. The risk management system and procedures are assessed as satisfactory.

Funding and liquidity assessment has been improved to adequate. ACRA points to a decline in the resource base concentration for the ten largest groups of creditors (27.4% of liabilities). The Bank’s resource base is made up equally of the funds of physical persons and legal entities (41% of liabilities each).

Given the uncertainty about the future owner and development strategy of the Bank, its corporate funding base continues to be mostly short-term. At the same time, the structure of funding raised in the interbank lending market has changed in relation to the increased terms. As a result, at the end of 2018, the short-term liquidity shortage indicator (STLSI) was positive under the base case scenario, but under the stress scenario its surplus amounted to 1.9% of the Bank’s liabilities. In the long-term, the Bank’s liquidity position is still assessed as adequate but close to a weak level: the long-term liquidity shortage indicator (LTLSI) totaled 52% at the end of 2018.

Key assumptions

  • Changes in shareholding structure in the medium term;
  • Сapital adequacy ratio (N1.2) over 10% on the 12 to 18-month horizon;
  • Maintaining the current funding structure in the medium term.

Potential outlook or rating change factors

The Developing outlook assumes an equal probability of the rating being either upgraded or downgraded within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Transfer of shareholder control to an owner with a level of creditworthiness comparable to that of VEB.RF coupled with the creation of adequate strategic goals and business model of the Bank;
  • Significant asset quality improvement.

A negative rating action may be prompted by:

  • Deterioration of capital adequacy ratios due to the increase in the cost of risk, or a more aggressive growth of assets;
  • Deterioration of the liquidity and funding position;
  • Lower potential support from the shareholder.

Rating components

Standalone creditworthiness assessment (SCA): bb.

Adjustments: none.

Support: 4 notches up to SCA.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was 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.

The credit rating assigned to Sviaz-Bank was first published by ACRA on August 29, 2017. The credit rating is expected to be revised within one year following the rating action date (January 22, 2019)

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

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

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

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