ACRA upgrades Vozrozhdenie Bank to A(RU), changes outlook to Stable

The credit rating of Vozrozhdenie Bank (hereinafter, the Bank) has been upgraded to A(RU) due to the capital adequacy assessment being changed from weak to satisfactory, which led to the Bank’s standalone creditworthiness assessment (SCA) being upgraded to bbb-. The rating also takes into account the high likelihood of extraordinary support from the parent bank, Bank VTB (PJSC) (hereinafter, the Supporting Organization, or the SO).

The outlook on the credit rating has been changed from Positive to Stable to reflect the current plan for integrating the Bank with the SO (previously, the merger was scheduled for completion by mid-2020). At the same time, the SO’s plans for consolidating its Russian subsidiary banks remain unchanged and include merging Vozrozhdenie Bank with one of the other VTB Group banks in the next 12 months.

Vozrozhdenie is a universal bank ranking 39th by equity among Russian banks and operating in six of Russia’s federal districts, with a focus on Moscow and the Moscow Region.

Key rating assessment factors

High likelihood of extraordinary support from the shareholder. ACRA is of the opinion that, if necessary, the SO, whose creditworthiness is strong (which is conditioned by, among other reasons, the high systemic importance of the SO) compared to the Bank, will provide the Bank with short-term and long-term funding, in view of the following:

  • The pronounced legal integration between the Bank and the SO and full operational control of the SO over the Bank;
  • The significant operational integration between the Bank and the SO (in terms of corporate governance, assets and liabilities, risk management, etc.);
  • The Bank’s market positions (client base, presence in the Moscow area) is an additional plus for the VTB Group;
  • The high reputational risks the SO may face in case of bankruptcy of the Bank.

In view of the above, the level of integration between the Bank and the SO is assessed as strong.

ACRA’s opinion on the likelihood of support from the SO is expressed in the addition of four notches to the Bank’s SCA.

The adequate business profile assessment (bbb) is underpinned by the Bank’s market position and rather high diversification of operating income (the Herfindahl-Hirschman Index stands at 0.21), which is explained by the universal nature of the Bank’s business. The quality of corporate governance is assessed as adequate. The Bank’s strategy involves timely and successful integration of the Bank’s business into the SO.

The Bank’s capital position has been improved from weak to satisfactory as a result of Tier 1 capital adequacy (calculated as per Basel III) exceeding 9% primarily due to significant (1.8x) growth in retained earnings in 2019. The N1.2 ratio was 9.6% as of September 1, 2020 and averaged 9.5% in 2020, compared to 8.8% in 2019.

According to ACRA’s stress test, the Bank is able to withstand an increase in the cost of risk within the range of 300–500 bps without shareholders’ support. Given the losses incurred in 2018 (RUB 8 bln, according to adjusted reporting) as a result of a significant build-up of additional reserves under IFRS, the internal capital generation ratio, calculated for the last five years, is still negative. The Bank’s net interest margin (NIM) for the last three years corresponds to that of peer financial institutions (4.5%), while its operating efficiency (CTI) is far behind (65%).

The Bank’s weak risk profile assessment is determined by a consistently high share of problem and potentially problem loans: 21.7% as of June 30, 2020, including NPL90+ at 21%, restructured loans at 0.4%, and potentially problem (according to ACRA’s methodology) loans at 0.3%. These loans were largely issued prior to the Bank being acquired by the SO. The concentration on the ten largest groups of borrowers is around 16% of the portfolio. Additionally, the risk profile assessment is constrained by non-core assets on the Bank’s balance sheet, primarily investment real property (around 23% of common capital). However, the concentration of the loan portfolio on the construction and real estate sectors has declined over the past 12 months from 1.4x to 0.9x of common capital due to growth in the size of capital. The level of market and operational risks is not high.

Adequate assessment of liquidity and funding position. On the 90-day horizon, the Bank boasts a short-term liquidity surplus (around RUB 22 bln) under the base case scenario and a deficit (8.3% of liabilities) under the stress scenario. On longer-term horizons, ACRA does not observe any significant imbalances, with the long-term liquidity shortage indicator (LTLSI) equaling about 65% as of June 30, 2020, and no large redemptions expected in the next 12 months.

The share of the largest funding source (funds of individuals and individual entrepreneurs) within the Bank’s funding structure is assessed as high (71%); however, it is partially compensated by the low concentration on the largest client groups (4.5% and 10.6% of liabilities fall to the largest lender and top 10 lenders, respectively).

Key assumptions

  • SO retaining shareholder and operational control;
  • NIM at around 4%;
  • Capital adequacy (Tier 1/N1.2) maintained at no lower than 8%.

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:

  • Significant increase in capital adequacy;
  • Considerable improvement in loan portfolio quality caused by a significantly lower volume of non-performing loans;
  • Considerable decline in the volume of non-core assets.

A negative rating action may be prompted by:

  • Lower support from the key shareholder;
  • Deteriorating capital adequacy amid materialization of credit risks;
  • Higher concentration of the funding base on the largest lenders.

Rating components

SCA: bbb-.

Adjustments: none.

Support: SCA + 4 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, 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 Vozrozhdenie Bank was published by ACRA for the first on May 29, 2018. 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 Vozrozhdenie Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of Vozrozhdenie Bank and the statements of Vozrozhdenie Bank composed in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Vozrozhdenie Bank participated in its assignment.

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

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

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