Training on sovereign risk credit analysis, October 24

ACRA affirms А+(RU) to Bank “ROSSIYA”, outlook Stable

The credit rating of Bank “ROSSIYA” (hereinafter, Bank “ROSSIYA”, or the Bank) stems from its relatively strong business profile along with satisfactory capital adequacy, moderate level of non-performing loans, and strong liquidity position. The standalone creditworthiness assessment (SCA) is under certain pressure from significant concentration of both assets and funding on the Bank’s largest clients. The Bank’s sustainable competitive advantages and a high probability of support from its shareholders have a positive impact on the Bank’s rating.

Bank “ROSSIYA” is owned by a group of well-known Russian entrepreneurs, with Yury Kovalchuk as the largest shareholder controlling approximately 40% of the Bank’s stock. The Bank is one of the leading universal banks in Russia. Currently, the Bank operates exclusively in the internal financial market of Russia.

Key rating assessment factors

The Bank’s business profile (bbb+) reflects its strong position in the Russian banking system. Currently, the Bank ranks 15th by capital and assets among Russian credit institutions; the Bank has a recognizable brand. Its operating network includes 78 offices and branches, and is present in a number of large regions of Russia (the Bank’s business is somewhat concentrated in Moscow, St. Petersburg, and the Republic of Crimea).

The Bank’s business is moderately diversified: following the 2018 results, the Herfindahl — Hirschman Index used by ACRA to assess operating income diversification stood at 0.33. ACRA assesses management quality as satisfactory in the context of the Russian banking sector. The Bank’s strategy suggests organic growth in lending activities and assets in the existing business lines. The Bank has a transparent ownership structure.

ACRA estimates the Bank’s capital adequacy as satisfactory. The Bank’s core capital ratio under RAS (N1.2) was 8.9% as of July 1, 2019, which is in line with capital adequacy targets the Bank has set. According to a stress test performed by ACRA, the Bank’s capital demonstrates a sustainable capability of absorbing credit risks on the 12 to 18-month horizon. According to ACRA estimates, the averaged capital generation ratio (ACGR) for 2014–2018 amounted to 45 bps, which reflects low profitability of the Bank’s business concentrated on corporate lending.

Operating efficiency of the Bank’s activities is supported by cost-to-income ratio (CTI) that averaged 36% in 2016-2018, while net interest margin (NIM) was relatively low (it averaged 2.5% in the same period).

Satisfactory risk profile assessment reflects a moderate level of non-performing loans of the Bank coupled with heightened concentration on the largest groups of borrowers. According to the Bank’s IFRS statements, as of January 1, 2019, non-performing loans overdue for more than 90 days accounted for around 2% of the total loan portfolio, while the overall volume of impaired loans stood at 11% of the loan portfolio.

The Bank is characterized by moderate concentration of loans in high-risk industries: loans to construction and real estate companies accounted for around 43% of the Bank’s core capital. The Bank’s securities portfolio (around 22% of assets) is of a good quality and well diversified. Market and operational risks are traditionally at acceptable levels and do not exceed core capital amount.

Funding and liquidity factor is assessed as adequate. This assessment is based on the Bank’s short-term liquidity surplus in both base case and stress scenarios. Long-term liquidity is marked by adequate coverage of liabilities by assets with corresponding maturities. The assessment of this factor is restrained by funding concentration on the ten largest groups of creditors/depositors (over 30% of the Bank’s liabilities). The said funding structure is expected to remain unchanged on the rating horizon.

ACRA applies an individual upward adjustment of SCA by one notch in order to highlight a sustainable competitive advantage of the Bank arising from the sanctions regime imposed on the Bank by foreign states, which results in relatively more favorable conditions for its business activities in Russia.

The credit rating takes into account a high likelihood of support from the shareholders. The Bank is not a member of any identifiable group; however, ACRA takes into account the probability of the Bank’s support by shareholders and/or companies they own. According to the Methodology for Analyzing Member Company Relationships within Corporate Groups, ACRA assesses the probability of such support as high, and therefore, adjusts SCA by two notches up.

Key assumptions

  • Cost of credit risk remains in the 2–3% range within the 12 to 18-month horizon;
  • Bank’s capital adequacy level (N1.2 ratio) not lower than 8% 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:

  • Higher capital adequacy ratios, including through net income growth and additional capitalization;
  • Lower loan portfolio concentration on the largest borrowers, while preserving a moderate level of non-performing loans;
  • Diversification of funding sources.

A negative rating action may be prompted by:

  • Substantial decrease of capital adequacy ratios;
  • Aggressive growth of the loan portfolio and the share of problem loans in the loan portfolio at rates significantly outpacing the market average;
  • Deterioration in liquidity position.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments:

  • Individual adjustment owing to a sustainable competitive advantage: one notch up;
  • Shareholders’ support: two notches up.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned 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 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.

A credit rating of Bank “ROSSIYA” was first published by ACRA on August 8, 2017. The credit rating and credit rating outlook 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 Bank “ROSSIYA”, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS statements of Bank “ROSSIYA” and statements of Bank “ROSSIYA” composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Bank “ROSSIYA” participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Bank “ROSSIYA” in its financial statements have been discovered.

ACRA provided additional services to Bank “ROSSIYA”. No conflicts of interest were discovered in the course of credit rating assignment.

Disclosure of deviations from the approved methodologies. The Bank’s SCA was adjusted by two notches up due to the need to consider support from the shareholders, which exceeds the maximum possible adjustment as set forth in the Methodology for Analyzing Member Company Relationship within Corporate Groups.

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