Forecasting in credit analysis, May 14–15

ACRA affirms AA(RU) to JSC Russian Agricultural Bank, outlook Stable, AA(RU) to senior unsecured debt, and B-(RU) to subordinated perpetual bond issues

ACRA has affirmed the credit rating assigned to JSC Russian Agricultural Bank (hereinafter Russian Agricultural Bank, or the Bank) and its bond issues as the main components of the assessment are maintained, in particular the high systemic importance of the credit institution for the Russian economy and the very strong degree of state influence on the Bank. However, the Bank is characterized by a moderately low standalone creditworthiness assessment (SCA). The Bank’s SCA reflects low capital adequacy and risk profile assessments, as well as a sufficiently high business profile assessment and adequate liquidity and funding. 

Russian Agricultural Bank is one of Russia’s largest credit institutions, ranked 5th in assets and 4th in capital, and is the third largest state-owned bank in terms of assets.The Bank focuses on corporate lending, especially to the agricultural sector – the business line subsidized by the state and prioritized for the Bank. Russian Agricultural Bank is wholly owned by the Russian Government.

Key rating assessment factors

High probability of the government providing the Bank with extraordinary support. Russian Agricultural Bank’s high systemic importance (according to ACRA’s Methodology for Analyzing Relationships Between Rated Entities and the State) is related to the potential consequences of its default, which may lead to a systemic banking crisis and cause significant problems in select agricultural subsectors, as well as pose significant risks for the federal budget and social stability. The very high degree of state influence is reflected in the Russian government executing shareholder and operational control over the Bank, in the latter’s close involvement with state-run agricultural programs, and in multiple instances of the Bank obtaining state support since its inception, mainly through capital replenishment. The degree of relationship with the state is reflected in the credit rating of the Bank.

Moderately strong business profile. The business profile assessment of Russian Agricultural Bank at ‘a-’ reflects its strong franchise and in particular its leading positions in lending to the agricultural sector as well as in the Russian banking system overall.  The strong franchise is supported by a well-developed regional network and customer loyalty, especially in regions with a pronounced agricultural focus. The Bank has one of the most developed networks in Russia, made up of 66 regional branches, 985 additional offices, and 270 operational offices. Russian Agricultural Bank boasts a medium operating income diversification.

The Bank’s current development strategy until 2020 includes ensuring a leading position in lending and servicing of agriculture and related industries, increasing diversification of income sources, improving efficiency and profitability, and improving the quality of the loan portfolio.

The Bank’s capital adequacy assessment remains low. The Bank maintains a satisfactory absorption buffer against unexpected losses in accordance with regulatory standards. N1.2 amounted to 11.043% as of March 1, 2019; N20.2 at 9.4% as of January 1, 2019. According to IFRS financial statements for 2018, the Bank’s capital adequacy, calculated in accordance with Basel II standards, did not exceed 8%. The Bank receives regular state support in the form of capital and places it in perpetual bonds. However, the Bank’s ability to generate capital remains extremely low. The averaged capital generation ratio (ACGR) for 2014-2018 was negative. ACRA notes that the reduction in the volume of new reserves created by the Bank contributes to the gradual improvement of the indicator. In 2018, the Bank recorded a net profit according to IFRS, which was significantly impacted by individual articles. The subsequent effect of these articles on the Bank's financial result is unlikely. Low profitability limits the Bank’s ability to withstand an increase in credit risk if the loan portfolio deteriorates or if Bank creates reserves for problem loans.

The Bank’s risk profile reflects a significant level of problem loans on its balance sheet. NPL90+ amounted to 14.9% in 2018, compared to 15.8% a year earlier. However, the balance sheet also contains loans classified by the Bank as default (stage 3, according to IFRS 9), as well as loans with high risk (stage 2). As a result, the total volume of problem or potentially problem loans, according to ACRA’s assessment, reaches 23%, which is still significantly higher than that of comparable Russian banks, including banks with state participation in capital. The Agency notes the Bank’s efforts aimed at improving work with borrowers, which in the future may lead to a better loan portfolio assessment and increased SCA.

The Bank’s loan portfolio retains a high share of lending to investment projects in agriculture and construction that are characterized by increased risks of cyclicity and seasonality, which is an element of increased risk according to ACRA’s methodology. An additional negative factor in assessing the risk profile is the growth of market risk (about 100% of fixed capital).

The Bank’s adequate liquidity and funding position is based on the high volume of liquid and highly liquid assets that provide sufficient coverage of potential outflows and high short-term liquidity ratios.  If necessary, the Bank has access to a considerable amount of regulatory, market, and government refinancing instruments.

The Bank’s funding structure is assessed as balanced. A major source of funding for the resource base continues to be corporate funds, the share of which however did not exceed 50% of liabilities. The Bank’s dependence on its largest creditors remains moderate. The share of the top ten largest creditors (investors) amounted to 25.8% at the end of 2018.

Key assumptions

  • Retaining the government's shareholder control over the Bank;
  • Cost of risk at around 2-3%;
  • Maintaining net interest margin at 3%;
  • Tier-1 IFRS capital adequacy above at 10-11% 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:

  • An increase in the Bank’s systemic importance for the state and substantial expansion of its functions.

A negative rating action may be prompted by:

  • Loss of shareholding and operating control by the Russian Government as well as decrease of the Bank’s systemic importance.

Rating components

SCA: bb+.

Adjustments: on par with the Russian Federation minus 2 notches.

Issue ratings

Credit rating rationale. The below listed issues represent senior unsecured debt of Russian Agricultural Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of the Bank — AA(RU).

JSC Russian Agricultural Bank, BO-05R (ISIN RU000A0ZYXJ4); redemption: March 9, 2022; issue volume: RUB 25 bln — AA(RU);

JSC Russian Agricultural Bank, BO-04R (ISIN RU000A0ZYJ42); maturity: December 9, 2020; issue volume: RUB 5 bln — AA(RU);

JSC Russian Agricultural Bank, BO-03R (ISIN RU000A0ZYBT9); maturity: September 28, 2021; issue volume: RUB 7 bln — AA(RU);

JSC Russian Agricultural Bank, BO-02R (ISIN RU000A0JXUC1); maturity: June 21, 2021; issue volume: RUB 10 bln — AA(RU);

JSC Russian Agricultural Bank, BO-06R (ISIN RU000A0ZZPZ3); maturity: October 14, 2022; issue volume: RUB 13 bln, — АА(RU);

JSC Russian Agricultural Bank, BO-07R (ISIN RU000A0ZZVQ0); maturity: November 22, 2038; issue volume: RUB 19.9 bln, — АА(RU).

Credit rating rationale. The below listed issues represent a significant level of subordination with respect to senior unsecured creditors as well as the right of Russian Agricultural Bank to cancel at its own discretion any interest payment on these issues at any interest payment date, with lenders obtaining no right to claim the unpaid interest. According to ACRA’s methodology, the final credit rating of this type of issue has to be five notches below the standalone creditworthiness (SCA) assessment of the Bank (bb+) — B-(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 01Т1 series (RU000A0ZZ4T1); maturity: perpetual; issue volume: RUB 10 bln, — B-(RU);

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 09Т1 series (RU000A0ZZ505); maturity: perpetual; issue volume: RUB 5 bln, — B-(RU);

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 31Т1 series (RU000A0ZZUS8); maturity: perpetual; issue volume: RUB 5 bln, — B-(RU);

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 11B1 series (RU000A0ZZY59); maturity: perpetual; issue volume: USD 50 mln, B-(RU).

Regulatory disclosure

The credit ratings have been assigned to JSC Russian Agricultural Bank and to bonds (RU000A0ZYXJ4, RU000A0ZYJ42, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59) issued by JSC Russian Agricultural Bank 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, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and the State. 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 process of credit rating assignment.

The credit rating of JSC Russian Agricultural Bank and credit ratings of bonds (RU000A0ZYXJ4, RU000A0ZYJ42, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59) issued by JSC Russian Agricultural Bank were published by ACRA for the first time on April 11, 2017, March 21, 2018, December 8, 2017, October 6, 2017, June 28, 2017, October 22, 2018, December 4, 2018, May 7, 2018, May 7, 2018, November 26, 2018, December 20, 2018, respectively. The credit rating of JSC Russian Agricultural Bank and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.

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

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

ACRA provided additional services to JSC Russian Agricultural Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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