The credit rating assigned to AK BARS Bank (hereinafter, the Bank) is a result of the adequate business profile assessment, adequate capital position, and weak risk profile and satisfactory position in funding and liquidity. The rating is backed by the high likelihood of extraordinary support from the government.

Changing the outlook to Positive reflects ACRA’s opinion that the Bank’s risk profile will most likely improve within the 12 to 18-month horizon driven by higher quality of the loan portfolio.

The Bank is a large regional universal bank focused on SMEs and consumer lending services, mostly mortgage loans. The Bank is among top 20 banks by equity and top 30 by assets in Russia. The Bank operates in five federal districts of Russia, benefiting on 230 local offices. The Bank is controlled by the Government of the Republic of Tatarstan (ACRA rating: ААA(RU), outlook Stable) jointly with the management of JSC “Svyazinvestneftekhim.”

Key rating assessment factors

High likelihood of extraordinary support from the Government of the Republic of Tatarstan (the RT). In ACRA’s opinion, a potential default of the Bank may disrupt the bank system in the RT and push up reputational risks for the RT Government. Irrespective that the Bank is not a key taxpayer in the RT, ACRA assesses risks of deteriorating financial status of the Bank as significant for the local budget. The Bank perform an important transactional function for the RT budget funds and keeps on its accounts about 15% of total retail deposits in the republic. The Bank participates in a range of socially important projects (public transport payment system, electronic payments), in which it serves 100% of retail payments. On numerous occasions in previous years, the Bank received substantial volumes of financial assistance from the shareholder.

Adequate business profile (bbb) is characterized by a steady franchise of the Bank in the RT banking market and its role as a reference bank for the RT Government. The assessment is supported by the high diversification of the Bank's operating income. The Agency notes the continuation of positive changes in the corporate management. The strategy of the Bank is aimed at developing its business as a universal credit institution, at both the RT and the federal levels. The Agency notes the adequacy of macroeconomic assumptions of the Bank’s strategy. The key element of the near-term strategy is a plan to increase lending and expand the range of other financial services offered to individuals and SMEs.

ACRA maintains its adequate assessment of loss absorption buffer. The Agency notes the increase in capital adequacy ratios (N1.2 equaled 12.7% as of November 1, 2019, and Tier-1 stood at 15.58% as of September 30, 2019); it expects them, however, to moderately decline within the 12 to 18-month horizon resulting from the loan portfolio growth of the Bank. At the same time, the Bank’s own capacity to generate capital is assessed as weak (the averaged capital generation ratio, ACGR, totaled 42 bps for 2014–2018) due to losses recorded in 2014-2015. The Bank’s operating efficiency is limited by the low level of net interest margin (NIM): 3% for 2016–2018. ACRA also notes deterioration in CTI figures: 41.2% for 2016-2018 vs 57.6% for 9M2019. According to a stress test performed in line with ACRA’s methodology, the current loss absorption buffer allows the Bank to withstand an increase in the cost of risk of no more than 300–500 bps in the next 12–18 months without a breach of the regulatory ratios.

Weak risk profile is primarily determined by the quality of the Bank’s loan portfolio. As of September 30, 2019, the share of problem and potentially problem loans has increased to 11.4% (vs 8.6% as of September 30, 2018 while the provisioning coverage ratio is 46.1%. At the same time, ACRA notes a downtrend in the concentration of the Bank’s loan portfolio on top 10 groups of borrowers (19.4% as of September 30, 2019 vs 25% a year earlier) and expects it to continue if the Bank’s plans to grow its portfolio of retail and SME loans materialize. The fact that the Bank continues holding non-core assets on its balance sheet (17.1% of Tier 1 capital) limits the risk profile assessment. The Bank continues its efforts to improve the quality of its risk management system, which is the reason for ACRA to keep the satisfactory assessment of this factor.

Satisfactory position in funding and liquidity. ACRA assesses the Bank’s capability of withstanding an outflow of funds within a relatively short period as high, which is supported by the value of the short-term liquidity shortage indicator (STLSI). At the same, the credit institution’s capability to perform its obligations within the 12 to 18-month horizon depends on the willingness of the largest creditors/depositors to extend the period of holding their funds with the Bank. In view of the fact that current accounts and deposits of the Bank’s shareholders as well as funds of legal entities controlled by the RT represent the bulk of the Bank’s funding, the Agency assesses the liquidity shortage risk as low. As of the end of September 2019, legal entities and state-owned companies accounted for 67.6% of the funding base. ACRA notes an increased concentration on the largest lenders: the share of top 10 groups of lenders in the total volume of the Bank’s liabilities was almost 60% as of the end of September 2019. The Agency draws attention to the substantial dependence of the Bank on funds held by various republican structures.

Key assumptions

  • The Bank will maintain its current business model aimed at increasing the share of market business;
  • N1.2 will be higher than 9% in the next 12–18 months;
  • The share of problem and potentially problem loans will be below 15%;
  • NIM will be 2.5-3.5%;
  • The Bank will maintain its current funding profile.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Substantially improved loan portfolio quality, while the assessment of other risk profile components does not worsen;
  • Increasing internal capital generation capacity, while maintaining high capital adequacy ratios;
  • Declining concentration on the largest groups of lenders and funding sources.

A negative rating action may be prompted by:

  • Declining capital adequacy ratios;
  • Increasing share of problem and potentially problem loans above 15%;
  • Aggressively growing the loan portfolio;
  • Deteriorating loan portfolio quality;
  • Deteriorating liquidity position.

Rating components

SCA: bbb-.

Adjustments: none.

Support: state support, +3 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 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 Relationships Between Rated Entities and the State, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating assigned to AK BARS Bank was first published by ACRA on December 11, 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 AK BARS Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS financial statements of AK BARS Bank and statements of AK BARS Bank composed in compliance with the Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and AK BARS Bank participated in its assignment.

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

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

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