ACRA assigns B(RU) to NS Bank, outlook Stable

The credit rating assigned to NS Bank (hereinafter, the Bank) is based on the Bank's moderately weak business profile, weak capital adequacy position, critical risk profile, and adequate funding and liquidity positions.

Key rating assessment factors

The moderately weak business profile assessment (bb) is a reflection of the risks that are inherent to the Bank’s business model, which focuses on providing loans and guarantees to the construction sector, which ACRA views as high-risk, and active investments in real estate. ACRA notes that the bank’s financial indicators are highly unpredictable. This opinion is based on the fact that over the past six years, the Bank’s stability has been heavily dependent on credit losses, as well as other income and expenses related to investments in real estate.

However, these risks are partially mitigated by the Bank’s relatively stable position in the construction sector. The Bank has been providing financial services to companies in this sector for a number of years, has a sustainable client base, and accumulated extensive industry experience. The Bank’s strategy implies organic growth with a focus on the state guarantee market. However, ACRA notes that the Bank is a relatively small financial institution (108th in terms of capital), which makes it sensitive to the growing competitive pressure from larger market players amid declining lending activity in the sector.

The ownership structure is transparent: the ultimate beneficiary is Y. Petrov (with an 88.7% stake); the remaining 11.3% stake is held by his business partners and minority shareholders.

The Bank’s capital adequacy is weak, despite its relatively comfortable N1.2 ratio (9.4% as of November 1, 2019). This is due to highly volatile profits over the past six years. ACRA expects this to continue in the future, which might significantly limit the Bank’s loss absorption capacity.

Nevertheless, according to our calculations, we expect that in the absence of extraordinary profits or losses, the Bank should be able to absorb an increase in the cost of risk by around 300–500 bps without breaching the N1.2 ratio (minimum of 6%).

The capital adequacy assessment is also constrained by the Bank’s low operational efficiency: from 2015 to 9M 2019, the net interest margin averaged around 3%, while the average cost-to-income ratio was around 70%.

The Bank’s critical risk profile stems from the high concentration of the loan portfolio on the 10 largest groups of borrowers (approximately half of the loan portfolio) combined with a moderately high share of problem loans (around 16% of the loan portfolio). Enhanced credit risks are due to the focus on the construction and real estate sector. The riskiest part of the loan portfolio, housing and infrastructure construction, is comparable to the Bank’s equity. This may put considerable pressure on capital adequacy in the event of a negative scenario. The Bank’s guarantee portfolio is also primarily concentrated on the construction sector; the riskiest part of which accounts for around 30% of the total guarantees.

Besides lending, the Bank also actively invests in real estate through a number of different equity instruments, including closed-end real estate unit investment funds and co-investment contracts (around 15% of the Bank’s total assets). ACRA notes enhanced risks associated with this asset category, which has historically accounted for a significant portion of the Bank’s unexpected earnings and losses.

Adequate funding and liquidity positions. The Bank is able to withstand a significant outflow of client funds in ACRA’s base case and stress scenarios thanks to a substantial liquidity buffer consisting mainly of securities. For longer terms, ACRA sees no major imbalances, as the long-term liquidity shortage indicator exceeded 85% (an acceptable level) as of October 1, 2019, and no large repayments are expected to occur within the next 12 months.

The Bank’s funding base is primarily made up of funds held by retail customers (60–70% of the Bank’s total liabilities). At the same time, the 10 largest customers (customer groups) only account for around 30% of liabilities. ACRA does not expect any major changes to the funding profile within the next 12 to 18 months.

Key assumptions

  • Maintaining the current business model and its focus on the construction sector within the next 12 to 18 months;
  • Maintaining the N1.2 capital adequacy ratio (CAR) at no lower than 9% within the next 12 to 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:

  • Improved ability to generate stable earnings;
  • Sustainable growth of the N1.2 ratio above 12%;
  • Improved asset quality.

A negative rating action may be prompted by:

  • N1.2 ratio falling below 9%;
  • Deteriorating liquidity and funding position;
  • Weakening of the Bank’s competitive position in the construction sector.

Rating components

Standalone creditworthiness assessment (SCA): b.

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 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.

A credit rating has been assigned to NS Bank 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 was assigned based on the data provided by NS Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of NS Bank and the financial statements of NS Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and NS Bank participated in its assignment.

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

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

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