ACRA affirms AA(RU) to JSC Russian Agricultural Bank, outlook Stable, AA(RU) to senior unsecured debt, and upgrades subordinated perpetual bonds to B(RU)

ACRA has affirmed the credit ratings of JSC Russian Agricultural Bank (hereinafter Russian Agricultural Bank, or the Bank) and its senior unsecured debt, as the main assessment factors did not change, first of all, the Bank's high systemic importance for the Russian economy and the very strong degree of state influence on the Bank. The Bank's subordinated perpetual bonds have been upgraded, along with the upgrade in the standalone creditworthiness assessment (SCA) to bbb- based on the better risk profile assessment. The current risk profile, as well as low capital adequacy, moderately strong business profile, and adequate liquidity and funding result in the satisfactory SCA of the Bank.

Russian Agricultural Bank is one of Russia’s largest credit institutions, ranked fifth in assets and capital, and is the third largest state-owned bank in terms of assets.The Bank focuses on corporate lending, especially to the agricultural sector – the business line subsidized by the state and prioritized for the Bank. Russian Agricultural Bank is wholly owned by the Russian Government.

Key rating assessment factors

High likelihood of government support to the Bank. The Bank’s high systemic importance (according to ACRA’s Methodology for Analyzing Relationships Between Rated Entities and the State) is expressed in the potential consequences of its default, which could lead to a systemic banking crisis and cause significant problems in some segments of the agricultural industry, as well as pose significant risks for the federal budget and social stability. The very strong degree of state influence is reflected in the Russian government's shareholder and operational control over the Bank, close involvement of the Bank in state-run agricultural programs, and multiple cases of state support to the Bank, including mostly capital injections. The tightness of relationships between the state and the Bank is reflected in the Bank's credit rating.

The moderately strong business profile (a-) reflects the Bank’s strong franchise and in particular its leading positions in lending to the agricultural sector as well as in the Russian banking system overall. The Bank’s strong franchise is based on the developed regional network and customer loyalty, especially in those regions dominated by agribusinesses. The Bank’s operating network is one of the most developed in Russia, and as of December 31, 2020, it included 66 regional branches, 986 additional offices, and 314 operating offices. The Bank’s business is characterized by a medium level of operating income diversification.

The Bank’s strategy includes further development of banking services to the agricultural sector and related industries, mortgage lending, higher efficiency of operations, and better asset quality.

The Bank’s capital adequacy is still assessed as low. The Bank maintains a satisfactory absorption buffer against unexpected losses in accordance with regulatory standards. N1.2 stood at 11.23% as of February 1, 2021, while N20.2 stood at 10.15% as of January 1, 2021. In assessing the Bank’s capital adequacy, ACRA took into account the Bank’s relatively low capitalization under IFRS. The Bank receives regular state support in the form of capital and places it in perpetual bonds. However, the Bank’s ability to generate capital is still extremely low. The Bank’s averaged capital generation ratio for 2016–2020 is negative regardless a sustainable growth in the financial performance in 2018–2020. At the same time, the Agency notes that the operating efficiency of the Bank is still low. The CTI ratio amounted to 51.4% and NIM to 2.4% in 2018–2020. On the other hand, the growing profitability of operations and better quality of the loan portfolio strengthen the Bank's capacity to withstand the growth in reserves for problem loans.

The risk profile has been upgraded from 'critical' to 'weak' to reflect a gradual increase in the loan portfolio quality if compared to Russian peers. NPL90+ loans amounted to 7.9% in 2020 compared to 11.7% a year earlier. The volume of loans ACRA considers problem and potentially problem (loans rated internally by the Bank as defaulted (IFRS 9 Stage 3) and high-risk loans (IFRS 9 Stage 2) had decreased from 18.5% to 12.5% in 2020. ACRA notes that the current level of problem and potentially problem loans is close to that of peer banks and expects that it will decline further due to, among other things, a higher growth rate of its loan portfolio (20% in 2020). The Bank's concentration on borrowers has been stable as the share of loans granted to the ten largest groups of borrowers was 29% in 2020. At the same time, ACRA notes that the market risk has increased, which may affect the risk profile in the future.

The Bank’s adequate liquidity and funding position is based on the high volume of liquid and high-liquid assets that provide sufficient coverage on potential outflows and high short-term liquidity ratios. If necessary, the Bank has access to a considerable amount of regulatory, market, and government refinancing instruments.

The Bank’s funding structure is assessed as balanced. A major source of funding for the resource base continues to be corporate funds, the share of which however does not exceed 50% of liabilities. The Bank’s dependence on its largest lenders remains moderate. In 2020, the share of the top ten largest lenders (depositors) continued to decrease and amounted to 17.3% of liabilities (excluding subordinated debt).

Key assumptions

  • The RF Government to keep the shareholder control over the Bank;
  • Cost of credit risk around 2-3%;
  • NIM not exceeding 3%;
  • RAS common capital adequacy at 9–11% in the next 12–18 months.

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:

  • Increase in the Bank’s systemic importance for the state and substantial expansion of its functions.

A negative rating action may be prompted by:

  • Loss of shareholder and operational control by the Russian Government as well as decrease in the Bank’s systemic importance.

Rating components

SCA: bbb-.

Adjustments: on par with the RF minus 2 notches.

Issue ratings

Credit rating rationale. The below listed issues represent senior unsecured debt of Russian Agricultural Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit ratings of the issues are equivalent to that of the Bank, AA(RU).

JSC Russian Agricultural Bank, BО-09P (RU000A100GM6), maturity: June 22, 2021, issue volume: RUB 10 bln — AA(RU).

JSC Russian Agricultural Bank, BО-10P (RU000A1011R1), maturity: November 10, 2023, issue volume: RUB 5 bln — AA(RU).

JSC Russian Agricultural Bank, BО-01R-P (RU000A101129), maturity: November 2, 2022, issue volume: RUB 5 bln — AA(RU).

JSC Russian Agricultural Bank, Uncertified BО-02R-R (RU000A101DD0), maturity: January 25, 2023, issue volume: RUB 5 bln — AA(RU).

JSC Russian Agricultural Bank, BO-05P (ISIN RU000A0ZYXJ4), redemption: March 9, 2022; issue volume: RUB 25 bln — AA(RU).

JSC Russian Agricultural Bank, BO-03P (ISIN RU000A0ZYBT9), maturity: September 28, 2021; issue volume: RUB 7 bln — AA(RU).

JSC Russian Agricultural Bank, BO-02P (ISIN RU000A0JXUC1), maturity: June 21, 2021; issue volume: RUB 10 bln — AA(RU).

JSC Russian Agricultural Bank, BO-06P (ISIN RU000A0ZZPZ3), maturity: October 14, 2022; issue volume: RUB 13 bln, — АА(RU).

JSC Russian Agricultural Bank, BO-07P (ISIN RU000A0ZZVQ0), maturity: November 22, 2038; issue volume: RUB 19.9 bln, — АА(RU).

JSC Russian Agricultural Bank, BO-03R-P (ISIN RU000A101WQ2), maturity: July 5, 2023; issue volume: RUB 5 bln — AA(RU).

JSC Russian Agricultural Bank, BO-04R-P (ISIN RU000A102713), maturity: September 27, 2023; issue volume: RUB 5 bln — AA(RU).

Credit rating rationale. The issues listed below demonstrate a significant level of subordination to senior unsecured creditors, as well as the Bank's right to refuse, at its discretion, from paying yield on bonds, without any creditor's right to claim unpaid interest. According to ACRA’s methodology, the final credit rating of this type of issues has to be five notches below the Bank's SCA (bbb-), i.e. B(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, C01E-01 series (RU000A101616), maturity: perpetual, issue volume: EUR 150 mln — B(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 01Т1 series (RU000A0ZZ4T1), maturity: perpetual; issue volume: RUB 10 bln —
B(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 09Т1 series (RU000A0ZZ505), maturity: perpetual; issue volume: RUB 5 bln —
B(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 31Т1 series (RU000A0ZZUS8), maturity: perpetual; issue volume: RUB 5 bln —
B(RU).

JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 11B1 series (RU000A0ZZY59), maturity: perpetual; issue volume: USD 50 mln
B(RU).

Regulatory disclosure

The credit ratings have been assigned to JSC Russian Agricultural Bank and to bonds (RU000A0ZYXJ4, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59, RU000A100GM6, RU000A1011R1, RU000A101129, RU000A101DD0, RU000A101616, RU000A101WQ2, RU000A102713) issued by JSC Russian Agricultural Bank 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 Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and the State. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the process of credit rating assignment.

The credit rating of JSC Russian Agricultural Bank and credit ratings of bonds (RU000A0ZYXJ4, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59, RU000A100GM6, RU000A1011R1, RU000A101129, RU000A101DD0, RU000A101616, RU000A101WQ2, RU000A102713) issued by JSC Russian Agricultural Bank were published by ACRA for the first time on April 11, 2017, March 21, 2018, October 6, 2017, June 28, 2017, October 22, 2018, December 4, 2018, May 7, 2018, May 7, 2018, November 26, 2018, December 20, 2018, June 28, 2019, November 20, 2019, November 20, 2019, February 10, 2020, and December 18, 2019, July 17, 2020, October 12, 2020, respectively. The credit rating of JSC Russian Agricultural Bank and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.

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

In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

ACRA provided additional services to JSC Russian Agricultural Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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