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ACRA affirms ВВВ+(RU) to Bank JSC MMA, outlook Stable

The credit rating assigned to Bank Joint Stock Company "Moscow Mortgage Agency" (the Bank) is based on the relatively stable standalone creditworthiness assessment (SCA) coupled with the high likelihood of extraordinary support from the Government of Moscow.

Bank JSC MMA is a relatively small universal bank with a limited regional concentration on Moscow region and a focus on corporates owned by or related to Moscow and individuals, including those serviced under the municipal social programs.

The Bank is 100% owned by the Municipal Property Department of Moscow. As of July 01, 2019, the Bank ranked 153rd in assets and 94th in equity among Russian banks.

Key rating assessment factors

High likelihood of extraordinary support is conditioned by the strong influence of Moscow Government on the creditworthiness of the Bank, although the systemic importance of the Bank for the regional economy is not high.

Regardless that the Bank is not among the key taxpayers of Moscow, there are certain risks for the city budget that may arise in case the financial standing of the Bank deteriorates. Such risks are assessed by ACRA as moderate: as of July 01, 2019, the Bank held about RUB 2.5 bln in accounts of corporates owned by or related to Moscow, therefore, the potential default of the Bank may cause moderate budget losses and significant reputational risks for the Moscow Government.

The 100% shareholding control of the Moscow Government over the Bank is combined with the moderate operational control. Apart from the RUB 4.5 bln capital injection carried out in 2009, the shareholder's support is also expressed in the Bank's involvement in socially important projects (subsidizing programs for low-income citizens, assistance to labor migrants) and the ability to service companies affiliated with the city and their employees.

In case of need, the shareholder may apply various tools to recapitalize the Bank. In view of the above, the Agency is of the opinion that the influence of the authorities on the Bank is strong.

The Bank's business profile (bbb) is assessed as adequate taking into account a relatively low assessment of franchise and a sufficient diversification of operating income with a pronounced regional concentration of operations. The Herfindahl-Hirschman Index used by ACRA to assess the operating income diversification is 0.21; however, ACRA expects that the index will decline in the next 12 months due to lower volumes of loans issued to both individuals and corporates.

The Bank management quality is assessed by ACRA as satisfactory and corresponds to the scope of business of the Bank. The ownership structure of the Bank is completely transparent.

The Bank's strategy for 2017–2019 includes integrated services to SMEs, including those owned by or affiliated with the Moscow Government, and their employees, as well as participation in the social and other municipal projects. At the same time, the Agency notes that the Bank has not attained certain performance indicators set forth in the strategy.

The Bank's capital adequacy is assessed as strong based on the high regulatory capital adequacy ratios (N1.2 = 39.0%, N1.0 = 39.5% as of July 1, 2019) and a moderate capacity to generate capital (the Bank's averaged capital generation ratio (ACGR) averaged to 70 bps for 2014–2018). A significant loss absorption buffer and high reserves for current problem assets allow the Bank to withstand an increase in credit risk by more than 500 bps without violating the capital adequacy ratios. The Bank's operational efficiency is generally comparable with that of peers.

ACRA assesses the Bank's risk profile as critical, as the level of problem loans is high and the portfolio concentration on the largest borrowers is significant.

As of July 01, 2019, NPL90+ comprised about 30% of the total loan portfolio of the Bank. According to ACRA's estimates, the aggregate share of problem and potentially problem loans is about 40% of the portfolio, which is significantly higher than the average market level. The share of the top 10 groups of borrowers is 58% of the Bank's loan portfolio, which indicates a high concentration pf the portfolio.

The Agency notes that the coverage ratio for the problem and potentially problem loans is high (about 95% as of July 01, 2019), while almost all NPL90+ are covered with reserves.

The Bank's securities portfolio includes debt instruments and exceeds 40% of assets. The Bank has been investing mainly in Russian sovereign bonds and bonds issued by companies with good credit quality. A significant portion of the portfolio is instruments nominated in foreign currency, which serves as a source of increased market risk relative to the average market indicator (more than 131% of common capital).

The Bank's risk management system matches the specifics and scale of its business and is assessed by ACRA as satisfactory.

Adequate liquidity and funding position. The Bank has a sufficient reserve of liquid funds to cover existing liabilities. As of July 01, 2019, the Bank was able to withstand the outflow of customers' funds under the base case scenario of ACRA, the short-term liquidity shortage indicator (STLSI) was positive, and the liquidity surplus exceeded RUB 7 bln. The stress scenario also showed a surplus of short-term liquidity. The Bank's long-term liquidity shortage indicator (LTLSI) exceeded 100%, which corresponds to a strong assessment.

The high concentration of the Bank's resource base on the funds of the largest corporate customers exerts a negative pressure on the funding factor: as of July 01, 2019, the share of the largest lender's funds was about 20% of liabilities, and the share of the top 10 lenders was 54%.

The current structure of the Bank's funding sources includes almost equal shares of funds held by both individuals and corporates.

Key assumptions

  • The state will retain its control over the Bank;
  • The Bank will pursue its business model and maintain its operating efficiency in the next 12–18 months;
  • The Bank will maintain the N1.2 ratio no less than 12% in the next 12–18 months.

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:

  • A significant decline in problem loans;
  • Lower concentration of the loan portfolio.

A negative rating action may be prompted by:

  • A loss by the state of its shareholding control over the Bank;
  • Lower significance of the Bank for the Moscow Government;
  • Lower diversification of the operating income;
  • Lower operating efficiency of the Bank;
  • Deteriorating liquidity positions;
  • A significant decline in capital adequacy ratios.

Rating components

SCA: bbb.

Adjustments: state support — one notch 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 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 Relationships Between Rated Entities and the State and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of Bank JSC MMA was first published by ACRA on August 30, 2018. 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 was assigned based on the data provided by Bank JSC MMA, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Bank JSC MMA and the financial statements of Bank JSC MMA drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 08, 2018. The credit rating is solicited, and Bank JSC MMA participated in its assignment.

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

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

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