ACRA affirms Industrial Savings Bank at B(RU), changes outlook to Negative

The credit rating of Industrial Savings Bank (hereinafter, the Bank) reflects its satisfactory capital adequacy, weak risk profile, and adequate funding and liquidity assessments. The Bank is also characterized by a relatively low business profile assessment.

The credit rating outlook has been changed to Negative in view of a potential downgrade in the risk profile assessment because in Q1 2021, the Bank's capital went down, which may result in a higher ratio of loans granted to high-risk industries and non-performing assets to common equity.

The Bank is a credit institution ranking 224th in assets among Russian banks and whose main lines of business include lending and other financial services to corporations. The Republic of Crimea is one of the regions where the Bank operates.

Key rating assessment factors

The relatively low business profile assessment (b+) is due to the Bank’s weak position in the Russian financial services market (218th in equity) and the lack of clear competitive advantages. The business profile assessment is supported by a satisfactory level of business diversification, which is based on a large amount of fee income. The Bank of operates in the Crimean Peninsula, where the level of competition in the banking sector is still relatively low. The Bank’s shareholders are a group of individuals, with the largest shareholder holding 17%.

The Bank’s capital adequacy position is assessed as satisfactory. The N1.2 CAR was 12.85% as of April 1, 2021, and the average N1.2 ratio for the past 12 months equaled to 11.22%. The average capital generation ratio amounted to 69 bps for 2016–2020. The Agency notes that in 2021, the Bank's common equity is going down but the capital adequacy ratios are still stable. The Bank's operational efficiency remains weak: in 2018–2020, the average CTI (cost to income) reached 80% and the average net interest margin (NIM) amounted to 8%. According to ACRA’s stress test, the Bank’s current capital adequacy ratios and profitability allow it to withstand an increase in the cost of credit risk within 300–500 bps.

ACRA has kept the weak risk profile assessment. As of April 1, 2021, problem and potentially problem loans accounted for more than 15% of the Bank’s loan book, compared to 20% as of January 1, 2021. The reserve coverage of these loans was less than 50%, which is partly due to the large amount of collateral provided by borrowers. The loan portfolio concentration remains high (the share of loans issued by the Bank to the ten largest groups of related borrowers was about 55% as of April 1, 2021), which has a negative impact on the portfolio quality assessment. ACRA notes an increase in the volume of loans granted by the Bank to high-risk industries (construction and real estate), which accounts for about 100% of common equity. In case the Bank maintains this level of lending to such industries amid a decrease in the volume of common equity, the Bank's standalone creditworthiness assessment (SCA) may be downgraded over a 12–18 month horizon. In addition, the above factors push the ratio of problem loans to common equity up, which, in the Agency's opinion, is also a risk factor.

The Bank's liquidity position remains strong. According to ACRA's estimates, as of January 1, 2021, the Bank had a short-term liquidity surplus of over RUB 1.2 bln in the base case scenario for calculating the short-term liquidity shortage indicator; the stress scenario showed that this indicator exceeded 10% of liabilities.

The high concentration of the resource base limits the rating score. The main source of funding for the Bank is corporate funds (about 70% of liabilities as of January 1, 2021), while the largest group of lenders (depositors) accounted for about 16% of total liabilities. The funds held with the Bank by the top ten groups of lenders (depositors) form more than 40% of all funds raised. ACRA notes the stability of account balances of a number of major depositors.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Cost of credit risk within 5%;
  • Maintaining positive operational efficiency;
  • N1.2 at least 9% within the 12-month horizon.

Potential outlook or rating change factors

The Negative outlook assumes that the rating may be downgraded within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Higher operational efficiency;
  • Substantially lower share of problem loans and concentration on the largest groups of borrowers;
  • Substantially lower concentration on the largest funding sources; lower dependence on the funds of the largest lenders/depositors.

A negative rating action may be prompted by:

  • Lower capital adequacy ratios;
  • Deteriorating asset quality;
  • Sustainably high ratio of loans to high-risk industries to common equity;
  • Growing ratio of problem and potentially problem loans to common equity;
  • Deteriorating liquidity position.

Rating components

SCA: b.

Adjustments: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

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

The credit rating of Industrial Savings Bank was first published by ACRA on July 19, 2018. The credit rating and credit rating 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 Industrial Savings Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Industrial Savings Bank and the financial statements of Industrial Savings Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and Industrial Savings Bank participated in its assignment.

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

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

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