Training on banks and NBCOs, January 30–31

ACRA upgrades credit rating of PJSC Sovcombank to A(RU) with a Stable outlook

The credit rating revision of PJSC Sovcombank (hereinafter – Sovcombank, the Bank) is based on improved risk profile position of the Bank. Sovcombank has moderately high creditworthiness as compared to other credit institutions in the Russian Federation; however, banks with this rating level are prone to some sensitivity to adverse changes in the commercial, financial, and economic conditions.

Sovcombank is a universal bank that specializes in lending to individuals (including mortgage, car loans, and classic consumer loans) and large and medium-sized businesses as well as in budget deficit financing of regional governments and municipalities. The Bank is one of the twenty largest credit institutions on the Russian market (by the size of own funds and assets) and ranks 12th in terms of deposits by individuals.

Key rating assessment factors

Change in risk profile assessment from satisfactory to adequate is based on a consistently high (compared to a sample of peers) asset quality of Sovcombank throughout the economic cycle. ACRA’s decision is supported by the fact that the Bank continues following a policy aimed at loan portfolio diversification in the corporate sector (including municipalities) and secured retail lending (home loans, car title loans), which improves business model’s robustness against adverse changes in the operating environment. The loan portfolio exhibits low share of problem loans (around 5% as at end of H1 2017, including NPL+90 at 2.8%) and high diversification by borrowers (the share of top ten borrowers was 16.6% in the above period). Market risks related to sizable investments into high-credit-quality debt securities denominated in a foreign currency (55% of total assets) are fully hedged by the Bank’s interest rate and FX swaps.

Adequate business profile reflects Sovcombank’s strong franchise in consumer lending as well as growing competitive edge in lending to large businesses, regional governments and municipalities. Acquisition of Metcombank and Nordea Bank’s retail portfolio created a potential for Sovcombank to visibly strengthen its competitive position in mortgage and car loan segments in the medium term. By making its asset base more versatile in the last three years, the Bank’s management was successful in achieving significant diversification of the operating income (the Herfindahl-Hirschman Index equaled 0.16 as at end of H1 2017).

Sizable loss absorption buffer. A substantial Tier-1 capital adequacy cushion (N1.2 ratio reached 10.6% as of August 1, 2017) is combined with strong capabilities in terms of generating new capital (the averaged capital generation ratio was around 300 bps in 2012-2016). According to ACRA’s estimates, within the 12 to 18- month horizon, Sovcombank is capable of withstanding an additional growth of the cost of risk by more than 600 bps without its Tier-1 capital adequacy ratio dropping below 6%.

Adequate liquidity position. The Bank can withstand an outflow of customer funds with a significant margin under ACRA’s base case and stress scenarios. At the same time, what is typical of the Bank, as compared to its peers, is a lower coverage of clients’ funds by high-liquid assets (12% as at July 1, 2017) calculated in compliance with the Bank of Russia requirements, which results from the securities portfolio structure with a prevailing share of banking, sub-federal, and corporate securities (of high quality) and a low share of federal bonds. The liquidity position is assessed as strong on the long-term horizon (STLSI exceeded 80% at early July 2017).

Satisfactory funding structure: the Bank’s liabilities primarily comprise funds of retail depositors (49% of liabilities) and short-term repo transactions with banks (35%) and exhibit moderate concentration on the largest creditors (the share of the largest creditor is 13%, and top ten creditors account for 35%).

Key assumptions

  • Maintaining strong competitive positions in key business segments;
  • Loan portfolio growth rate is within the range of 20–25%;
  • Cost of credit risk is within 2–3%;
  • Net interest margin is within the range of 5–5.5%;
  • Tier-1 capital adequacy (N1.2) is above 9% on the 12 to 18-month horizon;
  • Maintaining the current funding structure.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • A sustained increase of market share in key business segments;
  • Maintaining of a moderate risk appetite with business growth rate not exceeding market average;
  • A significant growth of secured lending share;
  • Improvement in the funding source balance.

A negative rating action may be prompted by:

  • A significant deterioration of the regulatory capital adequacy as a result of risk cost increase;
  • Deterioration of the liquidity position related to a thinning high-liquid asset cushion on the Sovcombank’s balance sheet;
  • Loss of competitive advantages in key business segments.

Rating components

Standalone creditworthiness assessment (SCA): a.

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.

For the first time, the credit rating has been assigned to PJSC Sovcombank on November 24, 2016. The credit rating and its outlook were revised on September 29, 2017. The next revision of the credit rating and its outlook are expected within one year following the rating action (September 29, 2017).

The assigned credit rating is based on the data provided by PJSC Sovcombank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS statements of PJSC Sovcombank and the financial statements of PJSC Sovcombank drawn up in compliance with the Bank of Russia Ordinance No. 4212-U of November 24, 2016. The credit rating is solicited, and PJSC Sovcombank participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by PJSC Sovcombank in its financial statements have been discovered.

ACRA provided an additional service to PJSC Sovcombank in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.

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