ACRA affirms BB+(RU) to JSC CB «Poidem!», outlook Stable

The affirmation of the credit rating and Stable outlook of JSC CB «Poidem!» (hereinafter, the Bank) is based on ACRA’s opinion that the Bank is able to cope with deteriorating asset quality amid increased risks in the operating environment thanks to strong capitalization and its currently high impaired loan coverage by loan loss reserves.

The Bank is a small credit organization that specializes in high-risk, according to ACRA, unsecured retail lending (issuing cash and credit card loans). This makes the Bank’s business model particularly sensitive to the tightening of the operating environment.

Key rating assessment factors

The moderately weak business profile assessment (bb) is due to the Bank’s limited competitive positions in Russia’s banking sector (ranked 139th in equity as of October 1, 2020) and a high-risk business model, according to ACRA. The Bank is focused on providing unsecured loans to customers, which makes it potentially more vulnerable during periods of economic downturn. In general, the increased risks of the model and its aggressiveness are also indicated by the fact that over the past five years the Bank has demonstrated significantly higher profitability indicators than the average for the sector.

The increased concentration of operating activities is somewhat mitigated by relatively high geographical diversification. The Bank operates in a large number of Russian regions, which, according to ACRA, might help it smooth out possible credit losses within the next 12 months.

ACRA’s assessment of the ownership structure and business reputation has remained unchanged. The Bank’s main shareholders are a group of individuals, with shares distributed as follows: Valery Kuzovlev, 33.5% (significant influence according to IAS 28); Mikhail Berezov, 19.9%; Vladimir Voeykov, 17.9%; Natalia Varodi, 8.7%; and with the remaining shares relatively evenly distributed between Dmitry Dyakin, Inna Ryabova and Leonid Batsev. ACRA notes that there are disputes regarding the legality of certain historical changes in the ownership structure, but assesses the associated risks for the Bank as minimal.

The improved capital adequacy assessment from adequate to strong is supported by ACRA’s base case expectations that the Bank will maintain its balance sheet capitalization indicators no lower than its current levels within the next 12−18 months. ACRA’s opinion is supported by the Bank’s relatively high current profitability indicators, despite a difficult operating environment. So far, net interest margin (NIM) has been the most determining factor for the Bank’s high profitability; according to ACRA, NIM has averaged about 22% since 2017, which is significantly higher than similar indicators for the sector. Over the past five full years, the Bank’s average capital generation ratio (AGCR) has equaled 94 bps, limited by significant losses in 2015.

According to ACRA’s expectations, the Bank’s capital adequacy will remain at a relatively comfortable level, above 11% within the 12 to 18-month horizon (N1.2 was 11.1% as of October 1, 2020, with a regulatory minimum of 6%). ACRA’s base case forecast assumes loan portfolio growth of 5−10% next year, with annual cost of risk and return on equity at about 9−12%. Additionally, the base case forecast now conservatively allows for some dividend payments within the 12 to 18-month horizon. However, ACRA notes that there is no certainty on this issue yet and the actual level of payments will depend on how the economy situation unfolds as well as the Bank’s financial condition. Some pressure on the profitability of operations will be exerted by the current general trend on lower interest rates in the economy amid stimulating monetary policy.

The downgrade of the risk profile assessment from satisfactory to weak is associated with an increase in problem lending in 2020. The current share of non-performing loans (the key criterion is classification into quality category 4−5 as per Russian regulation) is up to 25−30% of the loan portfolio, whereas at the beginning of March 2020, ACRA estimated it at 20−25%. A significant part of this share (about 13% of the portfolio) consists of loans that have been overdue for more than 12 months. Therefore, the overall high share of problem exposure in the portfolio is partly due to the write off policy of the Bank and the practice of collecting overdue payments in court.

As an additional positive rating factor, ACRA notes full coverage of non-performing loans with provisions for impairment, targeted compression of the loan portfolio this year to minimize potential credit losses, and its high granularity as factors somewhat mitigating risks.

Adequate funding and liquidity position. As of mid-March 2020, the Bank’s liquid assets accounted for around 21% of the balance sheet and covered around 30% and 44% of total and short-term (up to one year) client funds, respectively. The Bank’s main source of funding is retail deposits, which account for around 90% of liabilities. The share of funds from the largest clients (groups of clients) in total liabilities is insignificant.

Key assumptions

  • Maintaining the current business model;
  • Maintaining ACGR above 50 bps;
  • Maintaining N1.2 above 9%.

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:

  • Stabilization of economic risks and significant improvement in asset quality.

A negative rating action may be prompted by:

  • Significant credit losses, leading to decrease in N1.2 below 9% while ACGR remains below 100 bps;
  • Decrease in ACGR below 50 bps;
  • Deterioration in the liquidity and funding position.

Rating components

SCA: bb+.

Adjustments: none.

Support: none.

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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

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

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

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

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