The credit rating assigned to Joint-Stock Commercial Bank "NOVIKOMBANK" (hereinafter, the Bank) is based on its stable business profile, adequate funding and liquidity positions, and adequate level of capital adequacy. The likelihood is high that, in case of need, the Bank will be supported by its parent entity with high creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is restricted by a high concentration of the loan portfolio on the largest borrowers and related parties.
Key rating assessment factors
The Bank’s business profile assessment (bbb) reflects its rather high positions in the Russian banking system. As of September 1, 2019, the Bank ranked 27th in terms of capital and 25th in terms of assets among Russian banks. The Bank is characterized by a high-quality brand, as well as a satisfactory system of corporate governance and strategic planning. The Bank’s regional presence is determined by the need to service companies of the parent entity.
The Bank’s business profile assessment is limited due to the low diversification of its operating income (as of July 1, 2019, the Herfindahl–Hirschman index was 0.37), which is related to the specifics of the Bank’s market niche and its focus on lending to and servicing the parent entity’s companies. The long-term strategy of the Bank provides for further strengthening its positions as a universal credit institution that is deeply integrated into the financial structure of the parent entity which should help the volume of the Bank’s assets to continue actively growing.
Adequate assessment of the Bank’s capital adequacy. The regulatory capital adequacy ratios are at reasonably high values (as of September 1, 2019, the N1.2 ratio was 8.9%), which indicates a sufficient loss absorption buffer. The Bank’s capital adequacy ratios have fallen in 2019 due to growth of the Bank’s assets triggered by increased lending. The stress test carried out by ACRA indicates that the Bank is able to withstand a rise in the cost of credit risk by more than 500 bps without violation of the minimum prudential standards.
The net interest margin (NIM) demonstrated by the Bank in 2016–2018 is comparable with that of peer financial institutions (3.6%). At the same time, the average ratio of operating costs to income (CTI) amounted to 31% for the same period, which indicates the efficiency of the Bank’s core operating activities.
The Bank’s own ability to generate capital over the last five years is estimated as low (the averaged capital generation ratio (ACGR) is negative). This is caused by losses of previous periods suffered due to formation of reserves for problem loans.
The risk profile assessment is low, which is explained by the combination of satisfactory risk management quality and the high concentration of the Bank’s loan portfolio. According to the IFRS financial statements of the Bank, over the past year, NPL90+ have fallen significantly and account for less than 1% of the total loan portfolio. This is partially due to the Bank selling a significant amount of impaired loans to a company related to its key shareholder. ACRA estimates that the overall volume of problem loans has also fallen, and now amounts to 8.4% of the portfolio; reserves cover 83.2% of this debt.
Loans granted to the top 10 borrowers of the Bank account for 31% of the total loan portfolio. The loan portfolio of the Bank is also characterized by a high concentration on companies within the parent entity. According to IFRS financial statements, loans issued to parties related to the Bank’s shareholder account for more than 400% of Tier 1 capital. ACRA also takes into account that banking services and financing provided by the Bank to companies of the parent entity are a part of its functionality within the financial system of the parent entity. The risk profile assessment is constrained by the high growth rate of the loan portfolio. ACRA also notes that the Bank’s balance sheet includes assets that are not used in its core operations, namely real estate (around 20% of fixed capital).
The Bank’s securities portfolio is of a good quality, and market and operational risks are at acceptable levels.
Adequate funding and liquidity assessment. In mid-2019, the short-term liquidity shortage indicator was positive in the base case scenario; the stress scenario showed a liquidity shortage of 2.3% of liabilities. The long-term liquidity position of the Bank is assessed as strong: the long-term liquidity shortage indicator was 90% as of July 1, 2019.
Pressure on the funding assessment is exerted by the concentration of the Bank’s resource base on corporate funds. As of July 1, 2019, the share of the largest group of creditors’ funds amounted to about 70% of liabilities, while the share of top 10 groups of creditors’ funds was 82%. The main source of funds includes deposits and current accounts of legal entities (90% of liabilities as of July 1, 2019).
ACRA does not expect any significant changes in the funding structure on the 12 to 18-month horizon. High concentration on corporate funds does not affect the funding assessment, since such risks have already been taken into account in assessing the degree of concentration on the largest creditors’ funds. ACRA notes the stability of the volume of balances in the accounts held by companies of the parent entity.
The rating takes into account the high likelihood of support from the parent entity. The Bank’s strategy implies deepening its integration into the financial structure of the parent entity in order to optimize financing and provide banking services to the companies of the parent entity. The Bank’s importance to the parent entity is evidenced by: (1) recapitalizations of the Bank carried out by the parent entity in recent years; (2) current support provided to the Bank in the form of placement of funds held by companies of the parent entity and acquisition of problem debt from the Bank’s balance; and (3) the significant degree of operational control.
In view of the above, ACRA believes that the parent entity is willing and able to support the Bank if necessary, and therefore has added four notches to the Bank’s SCA.
- N1.2 CAR will not be lower than 8–9% in the next 12–18 months;
- The cost of credit risk will be around 3% in the next 12–18 months;
- The Bank will remain profitable in the next 12–18 months.
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:
- Improvement of the Bank’s asset quality;
- Higher operating efficiency and capital adequacy ratios;
- Lower concentration of the loan portfolio on the largest customers and related parties;
- A more balanced funding profile.
A negative rating action may be prompted by:
- Deteriorating capital adequacy caused by higher cost of risk or aggressive growth of assets;
- Declining importance and shrinking functionality of the Bank within the parent entity.
Standalone creditworthiness assessment (SCA): bbb-.
Support: SCA + 4 notches.
No outstanding issues have been rated.
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 Joint-Stock Commercial Bank "NOVIKOMBANK" was first published on October 19, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The assigned credit rating is based on the data provided by Joint-Stock Commercial Bank "NOVIKOMBANK", information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS financial statements of Joint-Stock Commercial Bank "NOVIKOMBANK" and financial statements of Joint-Stock Commercial Bank "NOVIKOMBANK" composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Joint-Stock Commercial Bank "NOVIKOMBANK" participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Joint-Stock Commercial Bank "NOVIKOMBANK" in its financial statements have been discovered.
ACRA provided additional services to Joint-Stock Commercial Bank "NOVIKOMBANK". No conflicts of interest were discovered in the course of credit rating assignment.