ACRA affirms B(RU) to NS Bank, changes outlook to Stable

The outlook on the credit rating of NS Bank (hereinafter, the Bank) has been changed from Negative to Stable because over the next 12 months, according to ACRA’s baseline expectations, the Bank should maintain its locally regulated tier one capital adequacy ratio (N1.2) at no lower than 9%, despite an expected significant growth of the guarantee and loan portfolios. The relatively comfortable capital buffer accumulated over the past 12 months will help ensure that N1.2 remains at this level. The change in outlook also reflects ACRA’s opinion on the absence of clear signs of a significant deterioration in the quality of the Bank’s loan and guarantee portfolios and other assets over the past 12 months, as well as the Agency’s base case expectations that potential pressure on the Bank’s capital should decline to some extent as economic activity recovers over the next 12 to 18 months.

The Bank’s credit rating is based on the moderately weak business profile, weak capital adequacy assessment, critical risk profile, and adequate funding and liquidity assessment.

Key rating assessment factors

The moderately weak business profile assessment reflects the risks that are inherent to the business model of the Bank, which specializes in the issuance of loans and guarantees to the high-risk, in ACRA’s opinion, construction sector (a significant portion of which involves government contracts), and also actively invests in real estate. The Agency notes the low stability of the Bank’s financial indicators over the past six years related to varying results of investment activity in the real estate sector, and based on this ACRA views the stability of the Bank’s business as low. The risks listed above are partially mitigated by the Bank’s relatively sustainable positions in the construction financing sector. The Bank has been providing financial services to companies in this sector for a number of years, has a sustainable client base, and has accumulated extensive industry experience.

Following a decline in lending and guarantee issuance activities in 2020 amid the backdrop of overall uncertainty, the Bank intends to grow its guarantee and loan portfolios by 45–50% in 2021. The Agency views this rate of growth as potentially risky, indicating the Bank’s growing propensity to take risks. A significant part of this growth will be driven by the availability of a significant amount of undrawn credit lines provided to the Bank’s regular borrowers.

The Bank’s ownership structure is transparent: the ultimate beneficiary is Y. G. Petrov (with an 88.7% stake), while the remaining 11.3% stake is held by his business partners and minority shareholders.

The Bank’s capital adequacy is weak despite its relatively comfortable N1.2 ratio (12% as of March 1, 2021). This is due to the expected active growth of exposures at risk in 2021, as well as the Agency’s opinion regarding the low quality of capital and profits. In particular, significant investments in real estate and fixed assets on the balance sheet (comparable to the size of the Bank’s capital) make the Bank’s profitability and capital sensitive to potential changes in fair value of such assets. These conclusions are also supported by the high volatility of profits over the past six years. ACRA expects this volatility to continue in the future, which might significantly limit the Bank’s loss absorption capacity.

The capital adequacy assessment is also constrained by the Bank’s low operational efficiency. Over the past three years, the net interest margin (NIM) averaged around 3.4–4%, while the average cost-to-income ratio (CTI) was about 80–85%.

Over the next 12 months, ACRA expects N1.2 ratio to decrease to 9.5–10% due to the rapid growth of risk weighted assets under our baseline scenario. Therefore, according to ACRA, in the absence of extraordinary profits or losses, capital accumulated by the Bank in the conservative 2020 will allow it to withstand an increase in the cost of risk in the range of 300–500 bps without violating the N1.2 ratio (minimum 6%).

The Bank’s critical risk profile is a result of the high concentration of the loan portfolio on the ten largest groups of borrowers (approximately half of the loan portfolio) combined with a moderately high share of problem loans (around 14–16% of the loan portfolio). The planned active growth of the Bank’s business also adds to the vulnerability of its financial stability.

Enhanced credit risks are due to the Bank’s focus on the construction and real estate sector (a significant part of which involves government contracts), which as a rule accounts for around 30–40% of loans and practically the entire guarantee portfolio. In addition to lending and guarantee issuance, the Bank actively invests in real estate using various instruments, including shared ownership (as of mid-2020, these assets totaled about 10% of the Bank’s balance sheet and, according to the Agency’s expectations, this share will not change considerably by the end of 2021). ACRA notes enhanced risks in this asset category, which in the past has accounted for a significant part of the Bank’s unexpected income and expenses.

The adequate funding and liquidity position is based on the substantial liquidity buffer accumulated by the Bank in 2020 consisting mainly of relatively high-quality securities — amid the uncertain external credit risks in 2020, the Bank limited its lending activities and increased the size of its securities portfolio. The Bank’s funding base is primarily made up of funds held by retail customers (no less than half of the Bank’s total liabilities). At the same time, the share of ten largest customers (customer groups) accounts for around a third of liabilities.

Key assumptions

  • Maintaining the current business model, which focuses on the construction sector, over the next 12 to 18 months;
  • Maintaining the N1.2 ratio above 9%;
  • Under ACRA’s stress test, the Bank is able to withstand a 300–500 bps increase in the cost of risk compared to the baseline expectations without breaching the N1.2 ratio;
  • Adequate liquidity metrics.

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 stability and predictability of operations;
  • Significant increase in the capital adequacy ratios, including the N1.2 ratio sustainably higher than 12% and/or enhanced ability to generate stable revenues;
  • Sustainable decline in the share of problem loans and guarantees.

A negative rating action may be prompted by:

  • N1.2 ratio falling consistently below 9% and/or worse performance in ACRA’s capital stress test as a result of aggressive growth of exposures at risk and/or increase in potentially problem assets and off-balance sheet credit liabilities, which may lead to significant credit losses;
  • Deteriorating funding and liquidity position;
  • Weakening competitive positions of the Bank.

Rating components

SCA: b.

Adjustments: none.

Support: none.

Issue ratings

There are no outstanding issues.

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

The credit rating of NS Bank was published by ACRA for the first time on February 5, 2020. 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 data provided by NS Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS statements of NS Bank and the financial statements of NS Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and NS 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 additional services to NS Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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