The credit rating on JSC "Bank DOM.RF" (hereinafter, the Bank) has been downgraded from BBB+(RU) to ВВВ(RU) on the negative change in the ACRA estimations of the volume and adequacy of the Bank's common capital, taking into account the nature of sources used to recapitalize the Bank in 2018, and lower risk profile assessment caused by an increase in the share of problem loans in the Bank's portfolio. Such changes have taken place after the date of the last rating action that took place before the publication date of the revised annual financial statements for 2017 audited by Ernst & Young LLC. ACRA also notes that the Bank undergoes an operational transformation, which may, in the Agency's opinion, improve its standalone creditworthiness assessment (SCA) in the future.

ACRA notes a significant likelihood of support (in the form of capital and liquidity) that, in case of need, may be provided to the Bank by its sole shareholder, JSC "DOM.RF" (AAA(RU), outlook Stable) (the Supporting Organization).

Key rating assessment factors

High likelihood of extraordinary support from the Supporting Organization underpins substantially the final assessment of the Bank's creditworthiness. The Agency notes that the Supporting Organization holds 100% shareholding and operational control over the Bank, whose bankruptcy may entail significant reputational risks for the Supporting Organization. On the other hand, ACRA is of the opinion that the Bank's strategic importance for the Supporting Organization is limited, as the Supporting Organization may engage other credit institutions to carry out its bank transactions, and the likelihood that the Supporting Organization's creditworthiness will be impaired by the Bank's default is low. ACRA notes that the developments plans of the Supporting Organization and the Bank contemplate that the role played by the Bank in the Russian construction industry will grow, which may drive up the Bank's strategic importance.

Medium assessment of the Bank's business profile (bbb-) reflects, among other things, changes that have taken place in its business after the change in the shareholding structure. The new strategy of the Bank is focused on development project finance and mortgage lending. In 9M2018, the Herfindahl–Hirschman Index indicating the average diversification of the operational income of the Bank amounted to 0.26. ACRA notes that the corporate governance quality has increased under the very strong influence of the Supporting Organization on the Bank's business. The comprehensive shareholder's control exercised by the Supporting Organization over the Bank allows the Agency to assess the transparency of the Bank's ownership structure as high.

The critical assessment of the Bank's capital adequacy reflects ACRA's opinion about the changes in the volume and structure of sources of common capital caused by recapitalization in 2018. Following the revision of asset quality and the allocation of additional reserves (as part of the acquisition of the Bank by JSC "DOM.RF"), the volume of the Bank's common capital significantly declined. After the recapitalization that took place in 2018, the N1.2 ratio exceeded 9%. On the other hand, capital sources included not only funds provided by the Supporting Organization (RUB 10.9 bln) but also gains received from revaluation of fixed assets (RUB 0.39 bln) and recognition of deferred tax assets (RUB 1.3 bln), restoration of reserves for possible losses under certain loans in view of repayment of such loans (RUB 3.2 bln), and restoration of reserves previously formed for a range of loans (RUB 3.8 bln), as part of the updated financial rehabilitation plan. The quality of such loans has not changed, and the required volume of reserves will be restored by late 2025, according to the financial rehabilitation plan. Without such sources, the N1.2 ratio would be around 6%. At the same time, in view of the substantial changes in the business model and the significant influence of changes in the volume of reserves for impairment of the loan portfolio on the financial performance of the Bank, ACRA assesses the Bank's capital generation capacity as neutral.

The final capital adequacy assessment is also affected by the low operational efficiency demonstrated by the Bank over the past years.

The Agency takes into account the expected improvement in the Bank's capital position and operational efficiency and applies a positive individual adjustment to the standalone creditworthiness assessment.

In its assessment of the Bank's ability to withstand the growth in the credit risk under the stress scenario, ACRA has taken into account that the Supporting Organization is likely to support the Bank with capital injections. Therefore, ACRA is of the opinion that possible increase in the reserves for certain problem loans is not a factor that pushes risks up, provided that the current shareholding structure remains unchanged, and ACRA assesses the results of stress testing as neutral for the Bank's capital assessment.

The Bank's risk profile assessment has been downgraded from satisfactory to critical on the decline in the quality of the Bank's loan portfolio and the relevant influence of the shrinking common capital on the certain risk profile components. ACRA notes a substantial increase in the amount of category 4 and 5 loans under RAS in 2018, in both absolute amount (from RUB 27.2 bln as of January 01, 2018 up to RUB 33.8 bln as of December 01, 2018) and percentage (from 13% as of January 01, 2018 up to 24% as of December 01, 2018). ACRA notes that this growth is mostly driven by the change in the loan portfolio assessment after DOM.RF has taken control over the Bank. The Agency also notes that the shrink in the common capital pushed up the relative volume of loans granted to companies operating in high-risk industries and non-core assets, which, according to ACRA methodology, is a factor affecting the risk profile assessment. In addition, the Agency points to a growth in the share of loans issued to finance the construction industry in 2018 and expects that this trend will persist, as a part of the current strategy, in the next 12 months.

Adequate liquidity and funding position is underpinned by the short-term liquidity assessment based on the short-term liquidity indicator (above 90 as of October 01, 2018), and the Bank's assets and liabilities well balanced by maturity. The structure of funding sources is considered by the Agency as diversified; however, ACRA notes that the share of funds held in the Bank by top 10 lenders/depositors exceeded 20% of the Bank's liabilities under IFRS as of September 30, 2018.

Key assumptions

  • The Supporting Organization will retain its shareholding and operational control over
    the Bank;
  • The current strategy of the Bank will be implemented with the focus on construction and mortgage loans;
  • The financial rehabilitation plan will be implemented in the format approved in November 2018.

Potential outlook or rating change factors

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

A positive rating action may be prompted by:

  • Growing common capital adequacy ratios;
  • A material improvement in the operational efficiency, higher capital generation capacity;
  • A material improvement in the loan portfolio quality;
  • Lower ratio of loans to high-risk industries and non-core assets to common capital;
  • Higher strategic importance of the Bank as a financial institution playing an active role in the housing development in Russia.

A negative rating action may be prompted by:

  • Deteriorating liquidity position of the Bank;
  • Higher dependence of the Bank on one of the funding sources.

Rating components

SCA: b+.

Adjustments: Individual adjustment for operational transformation: plus 1 notch.

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

For the first time, a credit rating of JSC "Bank DOM.RF" was published on June 13, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (January 10, 2019).

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

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

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

Disclosure of deviations from approved methodologies. Since the Bank undergoes financial rehabilitation, capital adequacy was assessed based on the statutory capital adequacy ratio (N1.2). The "quality of loan portfolio as compared to peers" sub-factor is assessed neutrally with a view of significance of changes the Bank undergoes and impossibility to compose a relevant peer group.

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Irina Nosova
Director, Financial Institutions Ratings Group
+7 (495) 139 04 81
Mikhail Polukhin
Director, Financial Institutions Ratings Group
+7 (495) 139 03 47
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