The credit rating of AO AKB "EXPRESS-VOLGA" (hereinafter, the Bank) has been upgraded due to the improvement of its capital adequacy assessment to adequate. The Bank’s credit rating is also based on the high likelihood of extraordinary support from the controlling shareholder, PJSC Sovcombank (ACRA rating — A+(RU), outlook Stable), moderately low business profile, adequate risk profile, and weak funding and liquidity position.

Key rating assessment factors

High likelihood of extraordinary support from the shareholder. The Bank is ultimately controlled by PJSC Sovcombank (hereinafter, the Supporting Organization), whose creditworthiness is moderately high. In ACRA’s opinion, the Supporting Organization is ready to provide the Bank with long-term and short-term financing and inject capital in view of the following:

  • Tightness of legal relations between the Supporting Organization and the Bank and complete operational control over the Bank on the part of the Supporting Organization;
  • Significant operational integration between the Bank and the Supporting Organization in terms of corporate governance, assets and liabilities, risk management, etc.;
  • The Supporting Organization may suffer substantial financial losses in case the Bank goes bankrupt;
  • The Supporting Organization may face high reputational risks in case the Bank goes bankrupt.

ACRA’s opinion on the support from the Supporting Organization is expressed in four notches up to the Bank’s SCA (bb).

Business profile assessment is moderately low (bb) particularly because the Bank’s strategy does not provide for developing the Bank as an independent entity. The Bank's aim is to perform the financial rehabilitation plan and merger with the Supporting Organization. The Bank holds a portfolio of securities that generates earnings allowing for repayment of the rehabilitation loan granted by the Deposit Insurance Agency. The Bank’s operations are an integral part of the Supporting Organization’s operations, which allows ACRA to assess the management quality in the Bank at the level equal to that of the Supporting Organization. The Bank’s main income source are interest earnings from securities (above 40% as of July 1, 2019). ACRA notes that income from operations with securities and foreign currency, which amount is subject to considerable fluctuations, has a significant impact on operating revenue.

ACRA upgrades the Bank’s capital adequacy position from satisfactory to adequate, given an increase in the unexpected loss absorption buffer. The N1.2 ratio stood at 8.2% as of July 1, 2019, vs. 6.81% as of August 1, 2018. These changes allow the Bank to withstand the growth in the cost of credit risk in the range of 300–500 bps without violating the regulatory standard. At the same time, the Agency notes that according to the financial rehabilitation procedure, the Bank may violate regulatory capital adequacy standards, but must comply with the benchmarks. The Bank’s own ability to generate new capital is assessed as strong: the average capital generation ratio (ACGR) based on the RAS financial data was 316 bps between 2016 and the first half of 2019.

Risk profile is assessed as adequate in view of the high credit quality of the Bank’s portfolio of securities and interbank loans granted by the Bank. The Agency points to a decrease in the market risk because of reclassification of a significant share of the securities portfolio into tools assessed at amortized cost. At the same time, ACRA points to the maintenance of a high concentration of the portfolio and the presence of bonds issued by issuers with a low credit rating of ACRA (15% of common capital). The Bank’s risk management system is part of the Supporting Organization’s risk management system and is therefore assessed as adequate.

The liquidity assessment is affected by the fact that a significant part of the securities portfolio is assessed by the Bank at amortized cost (i.e., it is planned to be held to maturity). As of late 1H2019, the short-term liquidity shortage indicator (STLSI) of the Bank was negative in both base case (-RUB 11.039 bln) and stress (-15.3%) scenarios of ACRA, while the long-term liquidity shortage indicator (LTLSI) was 72%.

Concentrated funding profile of the Bank. The Bank’s resource base is fully made up of funds of the parent company.

Key assumptions

  • The Bank’s operations will remain within the frames of the financial rehabilitation plan;
  • N1.2 will be above 7% in the next 12–18 months;
  • In case of need, the Supporting Organization will support the Bank with capital and liquidity.

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 decline in the short-term liquidity shortage;
  • Lower dependence of the resource base on the largest creditor/depositor;
  • Growing strategic importance of the Bank for the Supporting Organization.

A negative rating action may be prompted by:

  • A loss of shareholder or operational control by the Supporting Organization;
  • A deterioration in credit quality of the securities portfolio.

Rating components

SCA: bb.

Adjustments: none.

Support: +4 notches to 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 based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of AO AKB "EXPRESS-VOLGA" was first published by ACRA on September 6, 2018. 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 the data provided by AO AKB "EXPRESS-VOLGA", information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of AO AKB "EXPRESS-VOLGA" and the financial statements of AO AKB "EXPRESS-VOLGA" drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and AO AKB "EXPRESS-VOLGA" participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by AO AKB "EXPRESS-VOLGA" in its financial statements have been discovered.

ACRA provided no additional services to AO AKB "EXPRESS-VOLGA". No conflicts of interest were discovered in the course of credit rating assignment.

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Analysts

Valeriy Piven
Senior Director - Head of the Financial Institutions Ratings Group
+7 (495) 139 04 93
Victor Antonov
Associate Director, Financial Institutions Ratings Group
+7 (495) 139 04 80, ext. 221
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