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ACRA affirms credit rating of Expobank LLC at BBB+(RU), changes outlook to Positive

ACRA has affirmed the credit rating of Expobank LLC (hereinafter, Expobank, or the Bank) at BBB+(RU) based on its sustainable business profile, high capital adequacy, satisfactory risk profile, and adequate liquidity and funding position.

The change in outlook to Positive reflects ACRA’s expectation of a possible increase in the risk profile assessment due to an improvement in loan portfolio quality.

Expobank is a medium-sized Russian bank, which ranked 76th in assets and 69th in capital at the end of 2018. The majority stake is controlled by the Russian entrepreneur Igor Kim (directly owns 75.5%) who also owns banking assets in the Czech Republic, Latvia, Serbia. German Tsoy is another key shareholder (19.3%), as well as a number of other individuals including members of the Bank’s management team.

Key rating assessment factors

ACRA notes the Bank’s switch to active lending to individuals, whereas previously the Bank focused on working with corporate borrowers, M&A transactions, and the acquisition of third-party portfolios. Expobank is now focusing on expanding its auto loan portfolio and issuing guarantees. ACRA limits the Bank’s strategy assessment given the rapid growth of the Bank's assets associated with a significant change in their structure, as well as maintaining the appetite for the acquisition of large stakes in other credit institutions. However, ACRA also notes the extensive experience of the Bank’s management, which generally allows it to control the risks of qualitative changes in operating activities.

Expobank boasts a rather diversified business; its Herfindahl–Hirschman operating income diversification index was around 0.26 in 2018. Its transparent ownership structure exhibits a low degree of affiliation with the non-banking business of its key shareholders.

High capital adequacy indicators confirm the Bank’s strong common capital position according to both regulatory standards (N1.2 at 11.3% as of January 1, 2019) and Basel standards (the Bank estimated its Tier-1 capital under IFRS at 16.3% at the beginning of 2019). ACRA assesses Expobank’s ability to generate capital as high. ACRA’s stress test shows that the Bank’s substantial unexpected loss absorption cushion allows it to withstand a 300-500 bp increase in the cost of credit risk.

Satisfactory risk profile. According to ACRA’s assessments, the share of problem or potentially problem debt amounted to 6.2% of the portfolio (including NPL90+ at 1.3%). ACRA notes the significant change in the structure of the loan portfolio as a result of the rapid growth in auto loan issuance (more than 50% in 2018). This helped reduce loan portfolio concentration on the ten largest groups of borrowers from 51.7% in 2017 to 35.1% in 2018.

ACRA assesses the quality of Expobank’s risk management as adequate considering the development strategy it implements.  The rest of Expobank's assets are represented by a large portfolio of high-quality securities, as well as short-term interbank loans, including repo agreements with low credit risk.

The adequate funding and liquidity profile assessment is based on the combination of Expobank’s strong position in short-term and long-term liquidity and its relatively high funding quality.

ACRA notes the large amount of liquid and highly-liquid assets that allowed the Bank to show a substantial short-term liquidity surplus in both base case and stress scenarios. ACRA also notes the strong long-term liquidity shortage indicator (LTLSI) that exceeded 85% at the end of 2018.

In 2018, there were changes in the structure of the Bank's funding, which resulted in a decrease in the concentration on the largest source of funding (individuals’ funds) to 51.6% in the liabilities structure (62% at the end of 2017).

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Cost of risk no higher than 3%-4%;
  • Net interest margin around 5%;
  • Tier-1 capital adequacy (N1.2) no lower than 9.0% within the 12 to 18-month horizon.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely be changed within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A more conservative approach to the development strategy; 
  • Increase in the quality of the loan portfolio if the Bank's capital and liquidity positions do not deteriorate, as well as maintaining/increasing operating income diversification.

A negative rating action may be prompted by:

  • Decrease in business diversification;
  • Aggressive policy on asset growth implemented both through M&A transactions and through lending expansion, leading to a weakened loan portfolio and steady decrease in capital adequacy;
  • Substantial deterioration in risk management quality, leading to an increase in the volume of problem loans and negatively affecting capital;
  • Substantial deterioration in the Bank’s liquidity position.

Rating components

Standalone creditworthiness assessment (SCA):  bbb+.

Adjustments: none.

Support: no systemic importance.

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

The credit rating of Expobank LLC was published by ACRA for the first time on March 3, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned and affirmed credit rating is based on the data provided by Expobank LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of Expobank LLC and statements of Expobank LLC composed in compliance with the Bank of Russia Ordinance № 4927-U dated October 8, 2018. The credit rating is solicited, and Expobank LLC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Expobank LLC in its financial statements have been discovered.

ACRA provided additional services to Expobank LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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