ACRA upgrades Bank SOYUZ to BBB-(RU), changes outlook to Stable

ACRA has upgraded the credit rating of Bank SOYUZ (hereinafter, SOYUZ, or the Bank) on the better assessment of the Bank's capital adequacy and a relevant upgrade in its standalone creditworthiness assessment (SCA) to "bb." Moreover, ACRA has added two notches up to the SCA in view of a high likelihood of financial support from “Ingosstrakh Insurance Company,” the Bank's parent entity (hereinafter, the Supporting Institution, or the SI).

Bank SOYUZ is a universal bank holding medium positions (ranking 77th in terms of capital) in the Russian banking sector, with 95.9% of its shares controlled by the Supporting Institution. The Bank has been operating in six federal districts of Russia (with the highest concentration of the corporate segment in Moscow, while its retail business is diversified geographically). The primary lines of business include lending to both corporate customers (mainly medium-sized businesses) and households (mostly mortgage and car loans) in virtually equal proportion, factoring services, and transactional banking services related to, among others, the Supporting Institution (including current accounts, bank guarantees and insurance products).

Key rating assessment factors

High likelihood of extraordinary support from the Supporting Institution.
The Supporting Institution has high creditworthiness assessment and, in ACRA’s opinion, in case of need it will provide SOYUZ with sufficient long-term and short-term financing and inject capital, considering:

  • The degree of affiliation between the SI and the Bank and the SI’s ability to exercise control over the Bank's operations;
  • Capital injections provided by the SI to the Bank (RUB 1.9 bln in 2015 and RUB 2.4 bln in 2016) that were applied to increase the additional Tier-1 capital of the Bank;
  • Potential reputational risks for the SI in case the Bank defaults.

In view of the above, the Agency assesses the degree of relationships between the Supporting Institution and the Bank as moderate. ACRA’s opinion on the level of support from the SI is reflected in two notches added up to the Bank’s SCA (bb).

Satisfactory business profile. The strategy of the Bank is aimed at improving its operational efficiency through streamlined business processes, centralized management (to push down the branch network costs), and improved IT systems for faster decision-making and client service procedures. The operating income diversification is high (the Herfindahl-Hirschman Index stood at 0.19 as of March 31, 2019), which is due to the universal nature of the Bank’s business. The corporate governance quality matches the scope of the Bank's business and it is assessed as satisfactory.

The capital adequacy assessment has been upgraded to "satisfactory" on the Bank's stronger positions in capital as evidenced by the stress tests carried out by ACRA. In Q2 2019, after the problem loans due from the largest borrower were refinanced by a third-party bank, the Bank's ability to withstand a growth in the cost of risk grew significantly to about 700 bps (against 450 bps as of September 30, 2018). At the same time, the statutory capital adequacy ratios demonstrated by the Bank were rather high: as of July 1, 2019, N1.2 ratio was at 9.8% and N1.0 was at 11.9%, while the minimum recommended ratios are 8.125% and 10.125% (including the conservation buffer), respectively. On the other hand, the assessment is curbed by: 1) the extremely low capacity of the Bank to generate capital (the averaged capital generation ratio calculated for the last five years is negative, which is explained by substantial loan portfolio provisions the Bank had to allocate in 2015–2017; 2) the comparably low operating efficiency of the Bank, as the cost-to-income ratio and the net interest margin calculated by ACRA for the last three years stand at 80% and 4.9%, respectively.

The risk profile assessment is "critical" because of an active growth in the loan portfolio (+23.7%, up to 59% of assets) and a high, though declining gradually, share of problem and potentially problem loans in the loan portfolio (14.4%, including NPL90+ of 7.7% and restructured loans of 6.3%). At the same time, the ratio of reserves for problem and potentially problem loans is as low as 49%. According to ACRA’s estimations, the share of loans and bank guarantee receivables due from companies affiliated with the ultimate beneficiaries of the shareholders of “Ingosstrakh Insurance Company” may be as high as 64% of the common capital. The portfolio concentration on the top ten groups of borrowers is assessed as acceptable (21.7% of the portfolio) and the concentration on high-risk industries is assessed as moderate (37% of the common capital).

The Bank's investments in securities account for around 19% of assets, of which a significant share (75%) is occupied by the Russian government bonds and the CBR bonds.

On the other hand, the risk profile assessment is affected by the non-core assets (mostly, the property collected from defaulted borrowers) whose value may change; the share of such assets has been declining, but it is still high (27% of common capital). The liquidity of such assets is assessed as limited.

Adequate liquidity and funding profile. The Bank is capable to withstand a significant outflow of client funds in both base case (short-term liquidity surplus exceeds RUB 10.5 bln) and stress scenarios (the shortage is 3.5% of liabilities). Since early 2019, the average short-term liquidity indicator (STLI) has been higher than 100%. In case of a need, the Bank may raise additional funds through repurchase transactions, as the share of encumbered securities in its portfolio is low (25%). We also observe no liquidity imbalances on the longer-term horizon (the long-term liquidity shortage indicator, LTLSI, was 85% as of March 31, 2019).

The diversification of the Bank’s funding sources is assessed as acceptable: the share of funds held on corporate/personal accounts is 42%/41% of total liabilities. The resource base concentration on lenders is high, while the share of funds obtained from related parties, including those regarded as such by ACRA, is around a quarter of total liabilities. In the next 12 months, the Bank will repay a RUB 5 bln subordinated loan granted by State Corporation DIA in 2010, and this amount is expected to be substituted by long-term client deposits. As of March 31, 2019, the Bank had no funds raised from the Bank of Russia.

Key assumptions

  • The Bank’s business model will remain unchanged within the 12 to 18-month horizon;
  • NIM will be maintained at around 4–5%;
  • Maintaining a relatively high common capital adequacy (N1.2) within the 12 to 18-month horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely to remain unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Bank’s activities generating sustainable profits amid minimal dividend payouts;
  • A substantial reduction in the share of problem loans and the concentration of the loan portfolio on the largest groups of borrowers amid moderate risk appetite;
  • A significant decline in non-core assets on the Bank’s balance sheet;
  • A significant increase in the resource base diversification by creditor.

A negative rating action may be prompted by:

  • An increase in the volume of loans granted to the Bank’s direct or indirect affiliates;
  • An aggressive growth of the loan portfolio;
  • Worsening liquidity position.

Rating components

SCA: bb.

Adjustments: no.

Support: 2 notches up to the SCA.

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 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 as well as the Key Concepts Used by The Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to Bank SOYUZ was published by ACRA on December 29, 2017 for the first time. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating is based on the data provided by Bank SOYUZ, information from publicly available sources, and ACRA’s own databases. The rating analysis is based on the IFRS consolidated statements of Bank SOYUZ and financial statements of Bank SOYUZ composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 08, 2018. The credit rating is solicited, and Bank SOYUZ participated in its assignment.

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

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

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