Training on sovereign risk credit analysis, October 24

ACRA assigns AA(RU) to JSC «RN Bank», outlook Stable

The credit rating of JSC «RN Bank» (hereinafter – RN Bank, or the Bank) is based on a very high probability of the Bank obtaining support from its shareholders that boast moderately strong financial profiles. Its standalone creditworthiness is characterized by healthy capital adequacy, an adequate risk profile and satisfactory liquidity and funding positions.

RN Bank is a growing medium-sized credit institution fully owned by foreign shareholders, whose list includes the Italian bank UniCredit S.p.A. (40%), the French automobile manufacturer Renault S.A. (30% via its subsidiary RCI Banque S.A.), and the Japanese company Nissan Motor Co., Ltd (30%). As a captive finance company of Renault–Nissan Alliance, the Bank has focused its business profile on providing car loans and factoring financing of automotive dealers, with funds sourced mainly from its shareholders. RN Bank has no branch network and provides loans to individuals at car sales points (spread out nationwide, but concentrated mostly in the Central Federal District of Russia), while making factoring deals at its headquarters.

Key rating assessment factors

High likelihood of extraordinary shareholder support. ACRA believes that, when necessary, the shareholders (RCI Banque S.A., Nissan Motor Co., Ltd and Unicredit S.p.A., hereinafter – the supporting institutions) will provide the Bank with long-term and short-term financing, and replenish its capital, in view of the following:

  • The strategic importance of the Russian market for Renault–Nissan Alliance;
  • Potentially high reputational risks arising in case of RN Bank’s bankruptcy.

The final country risk of foreign supporting institutions’ presence jurisdictions compared to the Russian country risk, as well the Bank’s relationships with its shareholders are assessed by ACRA as generally strong, while supporting institutions’ creditworthiness is viewed by the Agency as moderately strong. In this regard, the Bank’s standalone creditworthiness assessment (SCA) is upgraded by 5 notches.

Adequate business profile. Operating income before provisions, although modestly diversified due to the narrow niche the Bank plays in (around 90% of its assets are formed by car loans and auto dealer financing), has been steadily climbing over the past three years fueled by a rapid development of both its core business and sideline activities (including insurance product sales to customers). Since the actual launch of operations in August 2013, after acquiring the license of bank Sibir followed by rebranding, RN Bank has been rapidly building up its operating efficiency, which is now assessed as high (as of December 31, 2016, its cost to income ratio, CTI, stood at around 35%). In 2017, the Bank pursues a strategy aimed at securing a moderate lending growth per year while maintaining net interest margin at 7–8%, which is generally in line with the current macroeconomic trends and is viewed by ACRA as a realistic approach in view of the humble market position the Bank has boasted so far. Its ownership structure is fully transparent, with no shareholder conflicts revealed up to date.

A material loss absorption cushion rests on the Bank’s own capital standing high by both the regulatory norms (N1.2 and N1.1 equaled 12.8% on February 1, 2017) and the Basel standards (Tier-1 was 10.8% at end-2016), which allows RN Bank to sustain a more than 500 bps increase in credit risk, while the relatively low averaged capital generation ratio (ACGR) of 23 bps shown over the past three years is typical for most credit institutions with a short-term operating track record of new strategy implementation.

Adequate risk profile assessment is based on the RN Bank’s risk management system quality, manifested through its independence in internal decision making and shareholder control over risk functions at the Bank, being further supported by high underwriting standards, transparent and streamlined risk management, and regularly updated risk management solutions. Among other things, all these factors in ensemble provide for a high quality credit portfolio (89% of assets), with the share of potentially problem loans being low by all measurements, including peer group analysis. According to ACRA, this share equaled 2.5% as of December 31, 2016, while NPL90+ stood at 0.8%. The dominant part of outstanding receivables is made up by car loans (76% of the portfolio), and the other 24% is filled up with factoring financing of automobile dealers. In short, the portfolio shows no concentration on high-risk industries and related parties, and a relatively low one of 13.4% on the largest borrowers. The Bank adheres to a conservative placement policy on the interbank market (4% of assets as of December 31, 2016), successfully avoiding counterparties with high credit risk.

Adequate liquidity position rests, in ACRA’s opinion, on RN Bank’s high capability to fulfill its obligations on the 90-day horizon, given its short-term liquidity surplus featuring in both the base case and stress scenarios, as well as the option for instantly raising short-term ruble liquidity from shareholders in significant amounts (of around one third of assets). Additionally, ACRA notes no imbalances within longer periods, with the short-term liquidity shortage indicator (STLSI) showing a comfortable 82%, while no large-scale redemptions/outflows are expected in the next 12 months.

Satisfactory funding profile. The Bank sources most of its funding from shareholders, who cover some 75% of its resource base by both providing interbank loans and opening deposits that get prolonged in case of necessity. That said, RN Bank is planning to issue bonds worth up to 10% of its liabilities in 1H2017 in order to diversify its funding structure (the Bank first tapped the bond market back in July 2016). No funds are raised from the regulator.

Key assumptions

  • Adhering to the current business model within the 12 to 18-month horizon;
  • No dramatic shareholder structure changes within the 12 to 18-month horizon;
  • Net interest margin within 7–8%;
  • Tier-1 capital adequacy (N1.2) above 11.5% 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:

  • A positive capital generation trend;
  • A decline in concentration on the largest creditor/creditors.

A negative rating action may be prompted by:

  • A decline in shareholders’ willingness to support the Bank;
  • A dramatic shift in the business development strategy.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments: none.

Support: 5 notches up against the SCA level.

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 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 Supporting Organizations Registered Outside 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 JSC «RN Bank» for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (February 28, 2017).

The assigned credit rating is based on the data provided by JSC «RN Bank», information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC «RN Bank» and statements of JSC «RN Bank» composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and JSC «RN Bank» participated in its assignment.

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

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

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