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

The credit rating of Bank SOYUZ (hereinafter, Bank SOYUZ, or the Bank) is based on the Bank’s satisfactory business profile and capital adequacy, low risk profile assessment, adequate funding and liquidity position, and the possibility of receiving extraordinary support from the parent company, Ingosstrakh Insurance Company (hereinafter, the Supporting Organization, or the SO).

Bank SOYUZ is a universal bank holding medium positions (ranking 76th in terms of capital) in the Russian banking sector, with 95.9% of its shares controlled by the SO. The Bank operates in six of Russia’s federal districts (with the highest concentration of the corporate segment in Moscow, while its retail business is diversified geographically). The primary lines of business include lending to both corporate customers and households, factoring services, and transactional banking services related to, among others, the SO (including current accounts, bank guarantees, and insurance products).

Key rating assessment factors

High likelihood of extraordinary support from the Supporting Organization. The SO has a strong creditworthiness assessment and, in ACRA’s opinion, if necessary it will provide the Bank with sufficient long-term and short-term financing and inject capital, considering:

  • The degree of affiliation between the SO and the Bank and the SO’s ability to exercise control over the Bank’s operations;
  • Capital injections provided by the SO to the Bank (RUB 1.9 bln in 2015 and RUB 2.4 bln in 2016) and the provision of a subordinated loan in 2019 worth RUB 1.5 bln;
  • Potential reputational risks for the SO in case the Bank defaults.

In view of the above, ACRA assesses the degree of the relationship between the SO and the Bank as moderate. ACRA’s opinion on the level of support from the SO is reflected in the addition of two notches to the Bank’s SCA (bb).

Satisfactory business profile. The strategy of Bank SOYUZ is aimed at improving its operational efficiency by streamlining business processes through centralizing management (to push down branch network costs) and improving IT systems for faster decision-making and client service procedures. The operating income diversification is high (the Herfindahl-Hirschman Index stood at 0.18 as of March 31, 2020), which is due to the universal nature of the Bank’s business. The corporate governance quality matches the scope of the Bank’s business and is assessed as satisfactory.

The satisfactory capital adequacy assessment stems from the satisfactory indicators with regard to regulatory standards and a low average capital generation ratio (ACGR). The statutory capital adequacy ratios demonstrated by the Bank were rather high: as of June 1, 2020, the N1.2 ratio was 11.1% and N1.0 was 13.3% while the minimum recommended ratios are 8.125% and 10.125% (including the conservation buffer), respectively. However, the assessment is curbed by: 1) the low capacity of the Bank to generate capital (the ACGR for the last five years is negative), which is explained by losses due to substantial loan portfolio provisions that the Bank had to allocate in 2016–2017; and 2) the comparably low operational efficiency of the Bank (the cost-to-income ratio and the net interest margin [NIM] calculated by ACRA for the last three years stand at 79.6% and 5.3%, respectively).

The Bank’s risk profile assessment is low because of a deteriorating operating environment and a high (though gradually declining) share of problem and potentially problem loans in the loan portfolio. ACRA notes a positive trend with regard to problem loans: the share of Stage 3 loans (under IFRS) was 9.3% as of the end of 2019, which is significantly lower than the indicator recorded in December 2018 (15.5%).

The level of coverage of problem loans has also improved: in December 2019 it was 99%, while at the end of 2018 it was 67%. The portfolio’s concentration on the ten largest groups of borrowers is assessed as acceptable (14% of the portfolio), and the concentration on high-risk industries is assessed as moderate (13% of fixed capital).

The Bank’s investments in securities account for around 16% of assets (19% in 2018), of which a significant share (86%) is occupied by Russian government bonds (OFZs) and Bank of Russia bonds (75% in 2018).

On the other hand, the risk profile assessment is negatively affected by the Bank’s non-core assets (mainly property collected from defaulted borrowers) whose value may change; the share of such assets continues to decline, but is still high (23% of fixed capital, compared to 27% in 2018). The liquidity of such assets is assessed as limited.

Adequate liquidity and funding profile. The Bank is capable of withstanding a significant outflow of client funds in both the base case and stress scenarios of ACRA. If necessary, the Bank can raise additional funds through repo transactions, as the share of encumbered securities in its portfolio is low (20%). ACRA also observes no liquidity imbalances on a longer-term horizon (the long-term liquidity shortage indicator, LTLSI, was over 100% as of March 31, 2020).

The diversification of the Bank’s funding sources is assessed as acceptable: the share of funds held on personal accounts is 46% of total liabilities, while the share held on corporate accounts is 40%. The resource base concentration on lenders is high, while the share of funds obtained from related parties, including those regarded as such by ACRA, amounts to 22% of liabilities. This March, the Bank repaid a RUB 5 bln subordinated loan granted by State Corporation Deposit Insurance Agency in 2010. As of March 31, 2020, the Bank had no funds raised from the Bank of Russia.

Key assumptions

  • Maintaining the business model within the 12 to 18-month horizon;
  • Maintaining NIM at around 4–5%;
  • Maintaining capital adequacy indicators (N1.2) within 9–12%.

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:

  • The Bank’s activities generating sustainable profits amid minimal dividend payments;
  • Stable reduction in the share of problem loans and the concentration of the loan portfolio on the largest groups of borrowers amid moderate risk appetite;
  • Significant decline in non-core assets on the Bank’s balance sheet;
  • Significant increase in the resource base diversification by creditor.

A negative rating action may be prompted by:

  • Increase in the volume of loans granted to the Bank’s direct or indirect affiliates;
  • Resumption of aggressive growth of the loan portfolio;
  • Worsening liquidity position.

Rating components

SCA: bb.

Adjustments: none.

Support: SCA + 2 notches.

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 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 credit rating assigned to Bank SOYUZ was published by ACRA for the first time on December 29, 2017. 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 SOYUZ, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of Bank SOYUZ and the statements of Bank SOYUZ composed in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Bank SOYUZ participated in its assignment.

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

ACRA provided no additional services to Bank SOYUZ. ACRA provided additional services to Ingosstrakh Insurance Company. No conflicts of interest were discovered in the course of credit rating assignment.

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