ACRA affirms А+(RU) to Bank “ROSSIYA”, outlook Stable

The credit rating of Bank “ROSSIYA” (hereinafter, Bank “ROSSIYA”, or the Bank) stems from its relatively strong business profile along with satisfactory capital adequacy, moderate level of non-performing loans, and adequate liquidity and funding position. The standalone creditworthiness assessment (SCA) is under certain pressure from the significant concentration of both assets and funding on the Bank’s largest clients. The Bank’s sustainable competitive advantages and a high likelihood of support from its shareholders have a positive impact on the Bank’s rating.

Bank “ROSSIYA” is owned by a group of well-known Russian entrepreneurs, with Yury Kovalchuk as its largest shareholder. The Bank is one of the leading universal banks in Russia. Currently, the Bank operates exclusively in the internal financial market of Russia.

Key rating assessment factors

The Bank’s business profile (bbb+) reflects its strong position in the Russian banking system. As of June 1, 2020, the Bank ranked 15th by capital and 13th by assets among Russian credit institutions. In ACRA’s opinion, the Bank has a high quality brand. Its operating network includes 76 offices and branches, and is present in a number of large regions of Russia (the Bank’s business is somewhat concentrated in Moscow, St. Petersburg, and the Republic of Crimea).

The Bank’s business is moderately diversified: following the 2019 results, the Herfindahl–Hirschman Index used by ACRA to assess operating income diversification stood at 0.35. ACRA assesses management quality as satisfactory in the context of the Russian banking sector. The Bank’s strategy envisages organic growth in lending activities and assets in the existing business lines, although at faster rates than the market average. The Bank has a transparent ownership structure.

ACRA assesses the Bank’s capital adequacy as satisfactory. The Bank’s capital ratio under RAS (N1.2) increased slightly over the past year and stood at 9.1% as of June 1, 2020, which is within the Bank’s capital adequacy targets. This indicator has grown due to, among other things, the Bank receiving a subordinated deposit with no time limit in 2019. According to a stress test performed by ACRA, the Bank’s capital demonstrates a moderate capability of absorbing credit risks within the 12 to 18-month horizon. According to ACRA’s estimates, the average capital generation ratio (ACGR) for 2015–2019 amounted to 39 bps, which reflects low profitability of the Bank’s business, which is concentrated on corporate lending. The operating efficiency of the Bank’s activities continues to be supported by the cost-to-income ratio (CTI).

The satisfactory risk profile assessment reflects the moderate level of non-performing loans of the Bank coupled with heightened concentration on the largest groups of borrowers. According to the Bank’s IFRS statements, as of January 1, 2020, Stage 3 loans accounted for around 7.5% of the total loan portfolio. The overall volume of impaired loans stood at around 10% of the loan portfolio as of the same date, according to ACRA’s assessment. Coverage of these loans amounted to 83%.

The Bank is characterized by a moderate concentration of loans in high-risk industries: loans to construction and real estate companies accounted for around 53% of the Bank’s fixed capital.

The Bank’s securities portfolio (around 23% of assets) is of a good quality and well diversified. The Bank also possesses units in a closed-ended mutual investment fund (around 8% of assets), which is made up of fixed income securities of highly reliable issuers. Market and operational risks are consistently at acceptable levels and do not exceed the size of fixed capital.

ACRA continues to assess the funding and liquidity factor is assessed as adequate. The Bank has a short-term liquidity surplus in ACRA’s base case scenario. In the stress scenario there is a deficit not exceeding 5%. Long-term liquidity is marked by adequate coverage of liabilities by assets with corresponding maturities. The assessment of this factor is constrained by the concentration of funding on the largest group (more than 15% of the Bank’s liabilities) and the ten largest groups of creditors/depositors (over 40% of the Bank’s liabilities). The funding structure is traditionally marked by its dependence on the funds of corporate clients and is expected to remain unchanged on the rating horizon.

ACRA applies an individual upward adjustment of the SCA by one notch in order to highlight a sustainable competitive advantage of the Bank arising from the sanctions regime imposed on the Bank by foreign states, which results in relatively more favorable conditions for its business activities in Russia.

ACRA also adjusts the SCA to take into account the high likelihood of support from shareholders. The Bank is not a member of any identifiable group; however, ACRA takes into account the probability of provision of support to the Bank by shareholders and/or the companies they own. According to the Methodology for Analyzing Member Company Relationships within Corporate Groups, ACRA assesses the probability of such support as high, and therefore, adds two notches to the SCA.

Key assumptions

  • Cost of credit risk remaining in the 2–3% range 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:

  • Higher capital adequacy ratios through net income growth or additional capitalization;
  • Lower level of non-performing loans coupled with reduced loan portfolio concentration on the largest groups of borrowers;
  • Diversification of funding sources.

A negative rating action may be prompted by:

  • Decrease of capital adequacy ratios;
  • Deterioration in operating efficiency indicators;
  • Deterioration in liquidity position.
  • Aggressive growth of the loan portfolio at rates outpacing the market average and increase in share of problem loans in the loan portfolio.

Rating components

SCA: bbb+.

Adjustments:

  • Individual adjustment owing to a sustainable competitive advantage: plus one notch;
  • Shareholder support: plus two 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 of Bank “ROSSIYA” was assigned by ACRA for the first time on August 8, 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 “ROSSIYA”, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of Bank “ROSSIYA” and statements of Bank “ROSSIYA” composed in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Bank “ROSSIYA” participated in its assignment.

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

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

Disclosure of deviations from the approved methodologies. Two notches were added to the Bank’s SCA due to the need to consider support from the shareholders, which exceeds the maximum possible adjustment as set forth in the Methodology for Analyzing Member Company Relationship within Corporate Groups.

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