Training on Forecasting September 17–18

ACRA assigns A-(RU) to PJSC Sovcombank, outlook Stable

The credit rating assigned to PJSC Sovcombank (hereinafter – Sovcombank, the Bank) is determined by its stable franchise, adequately diversified business model, strong capital adequacy assessment, comfortable liquidity position, and satisfactory risk profile assessment.

Sovcombank is a universal bank that specializes in consumer lending, unsecured lending to large and medium-sized businesses, and budget deficit financing on the sub-federal and municipal levels. The Bank is one of the 30 largest credit institutions on the Russian market (by the size of own funds and assets) and ranks 12th in terms of deposits by individuals. 

Key rating assessment factors 

Adequate business profile is characterized by Sovcombank’s stable franchise in the area of consumer lending as well as growing competitive edge in the area of lending to large businesses and state authorities of various levels. The Bank’s business profile is backed by the successful diversification of assets and operating income achieved by the Bank management within the last two years. ACRA assesses Sovcombank’s business strategy as sufficiently aggressive as a result of new cash assets that the Bank makes on a regular basis.

Sizable absorption buffer against losses is achieved through a combination of a substantial Tier-1 capital adequacy cushion (N1.2 ratio equaled 11.65% as of start-November 2016) and strong capabilities in terms of generating new capital (300–350 bps) both at the Bank and group levels. According to ACRA’s estimates, within the 12 to 18- month horizon, Sovcombank is capable of withstanding an additional growth of the cost of risk by more than 600 bps without its Tier-1 capital adequacy ratio dropping below 6%. 

Satisfactory risk profile position. Sovcombank’s loan portfolio is marked by an adequate share of problem loans (NPL90+ amounted to 4% as of end-September 2016) and an acceptable level of diversification of its 10 largest borrower group (32.5%). The factor assessment takes into account the sustained risk of Sovcombank’s loan portfolio quality deterioration owing to the Bank’s business expansion within the last two years by way of inorganic growth and issuance of unsecured loans (which make up more than 90% total loan portfolio) to large businesses, and sub-federal and municipal budgets, as well as growth of the Bank’s bond portfolio of corporate issuers.   

Adequate liquidity management policy. The Bank can withstand an outflow of customer funds under the ACRA base case scenario with a significant margin. Under the ACRA stress scenario, the Bank’s liquidity shortage registers at the average market level. The current funding structure is assessed as substantially balanced (STLSI was higher than 100% at end-October 2016) and having a highly diversified large lender group, but with a clear emphasis on attracting deposits from retail customers (55% total liabilities) and short-term repo transactions with banks (33%). The prevalence of term deposits in the Bank’s liabilities limits its ability to compete with the largest state-owned and private banks that also lend to Sovcombank’s target customer group.   

Key assumptions

  • Maintaining strong competitive positions in key business segments;
  • Loan portfolio growth rate is within the range of 10–15%;
  • Cost of credit risk is within 3–4%;
  • Net interest margin is within the range of 4.5–5.5%;
  • Tier-1 capital adequacy (N1.2) is above 9% within the 12 to 18-month horizon;
  • Maintaining the current funding structure.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:

  • A significant increase of market shares in key business segments; 
  • Maintaining a moderate risk appetite with business growth rate not exceeding market average;
  • Improving the funding source balance. 

A negative rating action may be prompted by:

  • A significant deterioration of the regulatory capital adequacy as a result of risk cost increase or aggressive dividend policy;
  • Deterioration of the liquidity position related to a thinning highly liquid asset cushion on the Sovcombank’s balance;
  • Increase of the money market interest rates, which will entail the interest rate risk materialization and put pressure on the Bank’s financial result;
  • Forfeiture of competitive advantages in key business segments by way  of further banking sector consolidation involving the largest banks.

Rating components

Standalone creditworthiness assessment (SCA): a-.

Adjustments: none.

Support: none.

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 has been assigned to PJSC Sovcombank for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (November 24, 2016).

The assigned credit rating is based on the data provided by PJSC Sovcombank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of PJSC Sovcombank Group and the standalone financial statements of PJSC Sovcombank, drawn up in compliance with the Bank of Russia Ordinance No. 2332-U of November 12, 2009. The credit rating is solicited, and PJSC Sovcombank participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by PJSC Sovcombank in its financial statements have been discovered.

ACRA provided no additional services to PJSC Sovcombank. No conflicts of interest were discovered in the course of credit rating assignment.

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