ACRA affirms BBB+(RU) to LOCKO-Bank, outlook Stable

The credit rating of LOCKO-Bank (hereinafter, the Bank) is based on the Bank’s satisfactory business profile, strong capital adequacy, satisfactory risk profile, and adequate funding and liquidity position.

LOCKO-Bank is a universal bank ranking 60th among Russian credit institutions in terms of capital and is present in six federal districts of Russia (except the Far Eastern District), with its highest concentration in Moscow and other cities with populations of over 1 million. The principal lines of the Bank’s business include retail lending (mainly consumer loans and car loans) and SME financing (currently, the focus is on contractual business customers), primarily by attracting consumer funds into deposits and as part of private banking activities. The Bank’s shareholder structure is transparent, including its ultimate beneficiaries. Around 72.5% of shares are owned, directly or indirectly, by top managers and members of their families.

Key rating assessment factors

Satisfactory business profile. The Bank’s strategy remains unchanged and involves the Bank’s transition to digital (i.e. with minimum number of offices) in order to increase its competitive advantage and operational efficiency. The scope of Bank’s business may increase by both organic growth and by making M&A deals (however, this approach is somewhat difficult due to the unstable economic situation in the country). Operating income is moderately diversified (Herfindahl-Hirschman Index stands at 0.26), and operating income dynamics have been stable over the last three years. However, in 2019, there were significant changes in the corporate governance structure that resulted in a new team of top managers being formed.

The substantial financial safety margin in terms of capital is based on high capital adequacy ratios under both under IFRS (Tier-1 ratio stood at 20.2% as of December 31, 2019) and regulatory standards (N1.2 stood at 13.4% as of June 1, 2020). This highlights the Bank’s ability to withstand an increase in the cost of risk by substantially more than 500 bps. The Bank’s ability to generate capital is also assessed as very high; the average capital generation ratio for the last five years has remained around 200 bps, which is due to, among other things, the absence of dividend payments since 2017. At the same time, CTI (cost to income) and NIM (net interest margin), which have been indicative of the efficiency of the Bank’s activities for the last three years, stand at around 52% and 6%, respectively.

The Bank’s satisfactory risk profile assessment is driven by the acceptable quality of the loan portfolio (59% of assets). As of April 1, 2020, the share of problem loans was 12.2% of the portfolio, including NPL90+ at 8.9%, restructured loans at 2.9%, and potentially problem loans at 0.4% (according to the loan portfolio analysis by top 30 groups of borrowers). At the same time, loan portfolio concentration on the largest borrower groups (top ten account for 7.9% of the portfolio) and high-risk industries (21% of teir-1 capital) is assessed by ACRA as low.

The quality of the securities portfolio (24% of assets as of April 1, 2020), which largely comprises corporate bonds issued by issuers with high creditworthiness, federal loan bonds, and Bank of Russia bonds, is generally assessed as high. At the same time, ACRA believes that the Bank's vulnerability to market risk is still moderate.

The strong liquidity position is based on the Bank’s ability to withstand an outflow of client funds under both ACRA’s base case (short-term liquidity surplus at RUB 12 bln) and stress scenarios (2.8% of liabilities). At the same time, the average short-term liquidity indicator has stood at 81% since the beginning of 2020. If necessary, the Bank can raise financing through repo transactions (as of March 31, 2020, the securities portfolio was not significantly encumbered). ACRA sees no imbalances in the longer term (long-term liquidity shortage stood at 100% as of March 31, 2020).

Satisfactory funding profile. The share of the largest funding source (funds of individuals, including wealth management clients and individual entrepreneurs) in the Bank’s liabilities is assessed as very high at 81%. At the same time, ACRA notes no resource base concentration on the largest groups of borrowers (top group at 2% and top ten at 10%). Over the next 12 months, ACRA expects no substantial outflows of funds. The Bank raises no funding from the Bank of Russia.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • NIM around 5.5%;
  • Tier-1 CAR remaining high within the 12 to 18-month horizon;
  • Maintaining the current resource base structure.

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:

  • Strengthening market positions while preserving a moderate risk appetite;
  • Significantly reduced problem or potentially problem loans in the loan portfolio;
  • Lower resource base concentration on the largest source.

A negative rating action may be prompted by:

  • Substantial decrease of Tier-1 CAR ratio and/or N1.2;
  • Increased problem loans in the loan portfolio;
  • Increased level of accepted market risks;
  • Deterioration in liquidity and/or funding position.

Rating components

SCA: bbb+.

Adjustments: none.

Support: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was 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.

The credit rating assigned to LOCKO-Bank was first published by ACRA on August 16, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the publication date of this press release.

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

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

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

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