Forecasting in credit analysis, May 14–15

ACRA upgrades the credit rating of Joint Stock West Siberian Commercial Bank and its bond issue to AA-(RU), changes outlook to Stable

ACRA has upgraded the credit rating of Joint Stock West Siberian Commercial Bank (hereinafter, West Siberian Bank, or the Bank) and its bond issue (ISIN RU000A0ZZ8T2) to AA-(RU), changing its outlook from Positive to Stable. The rating action is due to the acquisition of 71.8% of the Bank’s shares by VTB Bank (PJSC) (hereinafter, the Supporting Organization, or the SO) on January 9, 2019, and the possible extraordinary support from the SO. The remaining 28.2% of the Bank’s shares must be bought by the SO on the basis of a mandatory offer to shareholders. The full integration of the Bank and the SO will be completed in 2020.

West Siberian Bank is a universal bank with Tyumen and the Tyumen Region being its key operations area, where it boasts a leading market position. The Bank specializes in mortgage and consumer lending (7.1% share in the consumer lending market in the Tyumen Region), cash settlement and corporate lending, as well as investments into securities and interbank market operations. In addition, the Bank lends to regional authorities and entities owned by municipalities, issues bank guarantees, and provides other services to the above clients (cash settlement services, payroll programs, etc.).

Key rating assessment factors

High probability of extraordinary support from the SO. In ACRA’s opinion, the Supporting Organization is ready, if necessary, to provide the Bank with sufficient financing and increase its capital considering the following:

  • The degree of legal connection between the SO and the Bank, as well as the shareholder and operational control over the Bank on the part of the SO;
  • Potentially high reputational risks for the SO in the case of the Bank’s bankruptcy.

Taking these factors into consideration, the degree of connection between the Bank and the SO is assessed as strong. The creditworthiness of the SO relative to the SCA of the Bank is assessed as strong. ACRA’s opinion on the level of support from the SO is expressed in the addition of three notches to the Bank’s SCA.  

The satisfactory business profile assessment (bbb-) of the Bank stems from its current limited market position (ranking 60th in terms of capital among Russian banks at the beginning of December, 2018) as well as the high diversification of its assets and operational income. The Herfindahl Hirschman Index equals 0.16.

The Bank’s development strategy does not include any aggressive growth plans in any of its activities. The Bank’s priority development areas are increasing reliability and efficiency, growing organically in traditional business segments, and boosting the sales of banking products to existing customers.

The quality of corporate governance corresponds to the scale and activities of the Bank and is assessed as average in the context of the Russian banking industry.

The Bank’s substantial capital cushion is a result of its high capital adequacy ratios (N1.2 ratio totaled 10.86% as of December 1, 2018) and moderately strong capital generation capacity through retained earnings: the averaged capital generation ratio (ACGR) under IFRS totaled 152 bps in 2013-2017.

According to ACRA’s estimates, West Siberian Bank is capable of withstanding a gain in the cost of risk of over 500 bps within the 12 to 18-month horizon without breaching the statutory capital adequacy ratios.

The net interest margin (NIM) is moderately high and comparable to NIMs demonstrated by the Bank’s peers (the three-year average figure of 5.0%), while the cost-to-income (CTI) ratio is fairly high, averaging 64% for the last three years.

The Bank’s risk profile is assessed as adequate. The risk management system of West Siberian Bank corresponds to its scale and activities and is assessed as satisfactory. The key management team is competent, and its composition has not undergone significant changes, including as a result of the Bank’s change in ownership. The loan portfolio of West Siberian Bank exhibits a moderate level of problem loans (problem and potentially problem loans close to 7% as of September 30, 2018, NPL90+: 5,7%) and high diversification in its top ten borrowers (their share equals 10% of the total portfolio) stemming from the prevailing share of loans to individuals in the Bank’s portfolio.

The Bank’s securities portfolio (22% of assets) is made up of investments into government and corporate bonds of relatively high quality. The market risk is assessed as low and the operational risk as moderate.

Adequate funding and liquidity profile. The Bank has a short-term liquidity surplus in the base case scenario for short-term liquidity shortage indicator (STLSI) projections. Liquidity surplus equaled 5.6% in the stress scenario. ACRA notes no substantial imbalances in the longer term, which results in an acceptable long-term liquidity shortage indicator (LTLSI) value, around 85%.

Resource base concentration on funds of the largest and ten largest creditors (depositors) is low: 1.4% and 9.1% of liabilities, respectively.

Funding source diversification is assessed as weak: Funds of individuals and private entrepreneurs totaled around 69% of all liabilities as at October 1, 2018.

Key assumptions

  • The SO maintaining shareholder and operational control;
  • Maintaining the current business model and market positions within the 12 to 18-month horizon;
  • Maintaining credit risk costs in the range of 2.5–3% within the 12 to 18-month horizon;
  • Maintaining problem loans no higher than 8-9% within the 12 to 18-month horizon;
  • Maintaining Tier-1 capital adequacy (N1.2) above 10% 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:

  • Increased diversification of the resource base;
  • Significant reduction in the level of problem loans.

A negative rating action may be prompted by:

  • Decrease in the level of potential support from the SO;
  • Reduction in the credit quality of the loan portfolio;
  • Reduction in the capital adequacy ratio;
  • Deterioration of liquidity position;
  • Reduction in competitive positions in key regions and industries.

Rating components

Standalone creditworthiness assessment (SCA): a-.

Adjustments: none.

Support: SCA + 3 notches.

Issue ratings

Joint Stock West Siberian Commercial Bank, BO-P01 series (RU000A0ZZ8T2), maturity date – June 15, 2021 – RUB 2 bln – AA-(RU).

Credit rating rationale. The following bond issue represents senior unsecured debt of Zapsibkombank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of Joint Stock West Siberian Commercial Bank – AA-(RU).

Regulatory disclosure

The credit ratings of Joint Stock West Siberian Commercial Bank and the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) have been assigned under the national scale for the Russian Federation and are 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the credit rating assignment of the specified issue.

The credit ratings of Joint Stock West Siberian Commercial Bank and the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) were first published by ACRA on March 30, 2018, and June 5, 2018, respectively. The credit rating and outlook of Joint Stock West Siberian Commercial Bank and credit rating of the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) are expected to be revised within one year following the rating action date (January 29, 2019).

The credit rating was assigned based on the data provided by Joint Stock West Siberian Commercial Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of Joint Stock West Siberian Commercial Bank and the standalone financial statements of Joint Stock West Siberian Commercial Bank drawn up in compliance with Bank of Russia ordinance № 4212-U, dated November 24, 2016. The credit rating is solicited, and Joint Stock West Siberian Commercial Bank participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Joint Stock West Siberian Commercial Bank in its financial statements have been discovered.

ACRA provided additional services to Joint Stock West Siberian Commercial Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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