ACRA upgrades Vozrozhdenie Bank to A-(RU), outlook Stable

The credit rating of Vozrozhdenie Bank (hereinafter, the Bank) has been upgraded to A-(RU), outlook Stable (previously, the rating status was "Rating under revision: positive") reflecting: positive changes in the Bank's creditworthiness induced by the emergence of extraordinary support from the majority shareholder. The Bank's standalone creditworthiness assessment (SCA) is still moderately low (bb+).

On October 02, 2018, Bank VTB (PJSC) (the Supporting Institution) purchased 85% shares in the Bank. The integration between the Supporting Institution and the Bank is expected to be finalized in 2020.

Vozrozhdenie is a universal bank ranking 39th by equity among Russian banks and operating in six Russian federal districts, with the focus on Moscow and the Moscow Region. The main strategic focus of the Bank includes corporate loans issued mainly to construction and real estate companies, trading and manufacturing enterprises, state and municipal institutions, as well as SME loans and mortgage loans.

Key rating assessment factors

High likelihood of extraordinary support from the shareholder. ACRA is of the opinion that, in case of need, the Supporting Institution, whose creditworthiness is strong (which is conditioned by, among other reasons, the high systemic importance of the Supporting Institution) as compared to that of the Bank, would provide the Bank with short-term and long-term funding, in view of the following:

  • There is a pronounced legal integration between the Bank and the Supporting Institution and a full operational control of the Supporting Institution over the Bank;
  • There is a significant operational integration between the Bank and the Supporting Institution (in terms of corporate governance, assets and liabilities, risk management, etc.);
  • The Bank’s market positions (client base, presence in Moscow area) is a plus for the VTB Group;
  • High reputational risks the Supporting Institution may face in case of bankruptcy of the Bank.

In view of the above, the tightness of relations between the Bank and the Supporting Institution is assessed as strong.

ACRA's opinion on the likelihood of support from the Supporting Institution is expressed in adding four notches up to the Bank's SCA.

Adequate business profile assessment (bbb) is underpinned by market position and rather high diversification of operating income (Herfindahl-Hirschman Index of 0.23), which is explained by the universal nature of the Bank's business. The quality of corporate governance and strategic planning is assessed as adequate.

Capital adequacy assessment is 'weak' because of the low loss absorption buffer under both Russian regulatory standards (as of September 1, 2018, N1.2 stood at 8.1%, with the regulatory minimum of 7.875%) and Basel capital requirements (as of June 30, 2018, Tier-1 CAR was 9.96%), coupled with a substantial share of problem and potentially problem loans in the Bank's portfolio. According to ACRA stress tests, the Bank is able to withstand an increase in the cost of risk by about 250 bps without recourse to the shareholder's support. At the same time, the Bank posted a loss for the year 2015, which still negatively affects its averaged capital generation ratio calculated for the last five years (ACGR is as low as 40 bps). The Bank’s net interest margin (NIM) for the past three years corresponds to that of peer financial institutions (4.9%), while its operating efficiency is far behind (CTI is 58%).

Weak risk profile assessment is determined by the high share of problem and potentially problem loans: 15.1% as of June 30, 2018, including NPL90+ at 6.1%, restructured loans at 2.8%, and non-performing (according to ACRA methodology) loans at 6.2%, mostly issued to corporate ex-shareholders. The concentration on the top 10 borrower groups is rather high (18.5% of the portfolio). Moreover, the risk profile assessment is limited by the loan portfolio concentration on the construction and real estate sector (1.3x of the common capital) and the availability of investment real property on the Bank's balance sheet (28% of the common capital). The level of market and operational risks is not high.

Adequate assessment of liquidity and funding position. On the 90-day horizon, the Bank boasts a short-term liquidity surplus (around RUB 42 bln) under the base case scenario and a small short-term liquidity surplus (about 2% of liabilities) under the stress scenario. On longer-term horizons, the Agency observes no significant imbalances, with the long-term liquidity shortage indicator (LTLSI) equaling about 80% as of June 30, 2018, and no large redemptions expected in the coming 12 months.

The share of the largest funding source (funds of individuals and individual entrepreneurs) within the Bank’s funding structure is assessed as high (75%); however, it is partially compensated by the low concentration on the largest client groups (1.4% and 5.5% of liabilities fall to the largest lender and top 10 lenders, respectively). 

Key assumptions

  • The Supporting Institution will retain shareholder and operational control over the Bank;
  • NIM will be about 5%;
  • Current profile and volume of the loan portfolio will remain unchanged in the mid-term;
  • Current liability structure will remain unchanged in the mid-term.

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:

  • A material increase in capital adequacy out of profit generated by the Bank and/or through recapitalization by the key shareholder;
  • Better loan portfolio quality caused by significantly lower volume of non-performing loans and lower concentration on high-risk industries;
  • A decline in the volume of non-core assets;
  • A significant increase of the operating efficiency of the Bank.

A negative rating action may be prompted by:

  • Lower support from the key shareholder;
  • Lower capital adequacy on the backdrop of credit risk actualization;
  • Higher concentration of funding base on the largest lenders.

Rating components

SCA: bb+.

Adjustments: none.

Support: +4 notches up to the SCA.

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, Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to Vozrozhdenie Bank was first published by ACRA on May 29, 2018. The credit rating and the credit rating status are expected to be revised within one year following the rating action date (October 11, 2018).

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

No material discrepancies between the provided data and the data officially disclosed by Vozrozhdenie Bank in its financial statements have been discovered.

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

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