ACRA affirms Joint Stock West Siberian Commercial Bank at AA-(RU), changes outlook to Positive, and affirms its bond issue at AA-(RU)

The credit rating of Joint Stock West Siberian Commercial Bank (hereinafter, West Siberian Bank, or the Bank) is determined by high probability of extraordinary support from the shareholder (VTB Bank (PJSC), hereinafter, VTB, the Supporting Institution, or the SI). The standalone creditworthiness assessment (SCA) of the Bank is based on a strong business profile, strong capital adequacy and adequate risk profile assessment. The funding and liquidity factor is still assessed as adequate, although some deterioration in the Bank’s liquidity position is noted due to changes in assets.

The Positive outlook stems from West Siberian Bank’s merger with the Supporting Institution expected to be finalized in 2020-2021, which implies a transfer of the Bank’s obligations to an entity with a higher credit rating. VTB owns 88.87% of the Bank’s shares, while the Bank’s affiliates own another 11.12% of the shares.

West Siberian Bank is a universal bank that ranked 56th by equity among Russian credit institutions as of October 1, 2019. Tyumen and the Tyumen Region are the Bank’s key operations area where it boasts a leading market position. The Bank specializes in mortgage and consumer lending (around 7% share in the consumer lending market in the Tyumen Region) as well as corporate lending, and cash settlement services for legal entities and individuals.

Key rating assessment factors

High probability of extraordinary support from the Supporting Institution. In ACRA’s opinion, while the Bank’s integration is still in progress, the SI is willing, if necessary, to provide it with sufficient financing and make capital injections considering the following:

  • The degree of legal connection between the SI and the Bank, as well as the shareholding and operating control over the Bank by the SI;
  • High reputational risks for the SI in the case of the Bank’s bankruptcy.

Taking these factors into consideration, the degree of connection between the Bank and the SI is assessed as strong. The creditworthiness of the SI relative to the SCA of the Bank is assessed as strong. ACRA’s opinion on the level of support from the SI is expressed in adding three notches to the Bank’s SCA.  

The satisfactory business profile assessment (bbb-) of the Bank stems from its current limited market position and high diversification of its assets and operating income (the Herfindahl Hirschman Index equals 0.12).

The Bank does not plan to grow aggressively in any of its business lines. The group’s development strategy includes organic growth in the Bank’s traditional segments and increasing sales of banking products to new and existing clients. Successful integration into VTB while retaining the client base and the leading position in the regional market are currently the key objectives of the Bank’s operational activities.

The quality of corporate governance of the Bank is assessed as average in the context of the Russian banking industry.

The Bank’s substantial capital cushion is a result of its capital adequacy ratios that remain relatively high (Tier 1 capital adequacy ratio (N1.2) totaled 10.37% as of December 1, 2019) albeit a slight decline in 2019 and moderately strong capital generation capacity: the averaged capital generation ratio (ACGR) under IFRS totaled 129 bps in 2014-2018.

ACRA’s stress test shows that West Siberian Bank is capable of withstanding a gain in the cost of risk of over 500 bps within the 12 to 18-month horizon without breaching the statutory capital adequacy ratios.

The net interest margin (NIM) is comparable to NIM figures demonstrated by the Bank’s peers (the three-year average of 4.8%), while the cost-to-income (CTI) ratio is fairly high, averaging 60% for the last three years.

The Bank’s risk profile is assessed as adequate. The risk management system of West Siberian Bank is assessed as satisfactory. There were no significant changes in the key management team of the Bank after the change of ownership. The risk management procedures were aligned to that of the SI, while the Bank’s risk appetite is under shareholder’s control.

The loan portfolio of West Siberian Bank exhibits a moderate level of problem loans (problem and potentially problem loans were close to 6% as of September 30, 2019) and relatively high diversification in its top ten borrowers (their share is 14% of the total portfolio) stemming from the prevailing share of loans to individuals in the Bank’s portfolio.

The Bank’s securities portfolio (9% of assets) comprises investments in government and corporate high-quality bonds. The Agency notes that Bank’s security investments were down in 2019, while cash on time deposits with VTB increased.

Adequate funding and liquidity profile. The Bank has a short-term liquidity surplus in the base case scenario for short-term liquidity shortage indicator (STLSI) projections, and a 9.2% deficit in a stress scenario. The long-term liquidity shortage indicator (LTLSI) equaled 70%. The Bank’s short-term and long-term liquidity positions deteriorated over the first nine months of 2019 due to the decrease in security investments; however, this currently has no negative effect on the final assessment of the liquidity and funding factor. If necessary, the Bank also can raise funds through repo transactions against pledge of unencumbered securities available in its portfolio.

Resource base concentration on funds of the largest and ten largest creditors (depositors) is low: 2.3% and 10.1% of liabilities, respectively.

At the same time, funding source diversification is assessed as weak: Funds of individuals and private entrepreneurs totaled around 66% of all liabilities as of October 1, 2019.

Key assumptions

  • The SI maintaining shareholder and operational control;
  • Maintaining the current business model and market positions;
  • Maintaining problem loans at or below 10% within the 12-month horizon;
  • Maintaining Tier-1 capital adequacy above 10% within the 12-month horizon.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A successful completion of integration and merger of the Bank and the SI;
  • Lower resource base concentration on the largest sources;
  • A significant reduction in the level of problem loans.

A negative rating action may be prompted by:

  • A decrease in the level of potential support from the SI;
  • Deterioration in the liquidity position;
  • Reduction in the capital adequacy ratio;
  • Substantial deterioration of the loan portfolio quality;
  • Weakening of competitive positions in the key region and principle business lines.

Rating components

SCA: a-.

Adjustments: none.

Support: SCA plus 3 notches.

Issue ratings

Certified exchange-traded interest-bearing non-convertible unregistered bond, BO-P01 series (RU000A0ZZ8T2), maturity date – June 15, 2021; issue amount – RUB 2 bln; AA-(RU).

Rationale. The bond issue represents senior unsecured debt of Joint Stock West Siberian Commercial Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of Joint Stock West Siberian Commercial Bank – AA-(RU).

Regulatory disclosure

The credit ratings of Joint Stock West Siberian Commercial Bank and the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) have been assigned under the national scale for the Russian Federation and are 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. 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 credit rating assignment of the specified issue.

The credit ratings of Joint Stock West Siberian Commercial Bank and the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) were first published by ACRA on March 30, 2018, and June 5, 2018, respectively. The credit rating and outlook of Joint Stock West Siberian Commercial Bank and credit rating of the bond issued by Joint Stock West Siberian Commercial Bank (ISIN RU000A0ZZ8T2) 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 Joint Stock West Siberian Commercial Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of Joint Stock West Siberian Commercial Bank and the standalone financial statements of Joint Stock West Siberian Commercial Bank drawn up in compliance with Bank of Russia Ordinance № 4927-U dated October 8, 2018. The credit rating is solicited, and Joint Stock West Siberian Commercial Bank participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Joint Stock West Siberian Commercial Bank in its financial statements have been discovered.

ACRA provided additional services to Joint Stock West Siberian Commercial Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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