The credit rating of Sviaz-Bank (hereinafter, the Bank) was upgraded based on a higher probability of extraordinary support from a new shareholder, Promsvyazbank PJSC (AA(RU), outlook Stable; hereinafter, PSB, or the Supporting Institution), and an improved risk profile due to higher provisioning ratios and a buyout by VEB.RF of a number of problem assets when injecting new capital in the Bank, which resulted in the upgrade of the standalone creditworthiness assessment (SCA) from bb to bb+. The Bank’s liquidity and funding position is assessed as adequate, capital adequacy as satisfactory, and risk profile as weak.

The Positive outlook is based on the expectation that Sviaz-Bank’s merger into PSB will be finalized by mid-2020, which implies a transfer of the Bank’s obligations to an entity with a higher credit rating.

Sviaz-Bank is a universal bank with a vast federal network and strong positions in retail and corporate lending segments. The Bank ranked 30th in terms of own capital nationwide.

PSB acquired 99.98% of Sviaz-Bank’s shares in December 2019. Prior to that, this equity stake was owned by the Federal Agency for State Property Management after the transfer from VEB.RF in September 2019.

Key rating assessment factors

High likelihood of extraordinary support from the Supporting Institution. PSB is a captive bank for the Russian defense industry servicing the state defense procurement. The Russian Federation owns 100% of PBS shares, while sale and other share disposal methods are prohibited by law. ACRA believes that the Supporting Institution is willing to provide the Bank with sufficient financing and replenish its capital, if necessary, during the integration process in view of the following:  

  • Full shareholding control over the Bank by the Supporting Institution, planned discontinuation of Sviaz-Bank’s operations and its integration into PSB;
  • Close operational integration between the Bank and the Supporting Institution;
  • Significant reputational risks for PSB in case of the Bank’s bankruptcy.

Considering the above factors, ACRA assesses the degree of relationship between the Bank and the Supporting Institution as strong. The creditworthiness of the Supporting Institution as compared to the Bank’s SCA is assessed as strong.

Satisfactory business profile. Sviaz-Bank is a universal bank focused on mortgage lending and boasting a wide retail client base; it also lends to large and medium-sized companies. At the same time, the market position of the Bank has deteriorated during the preparation period for the merger with the Supporting Institution. The Bank’s operating income is characterized by an acceptable diversification with a focus on income generated from retail lending operations. The Bank’s corporate management quality is assessed as medium in the context of the Russian banking industry.

Significant loss absorption buffer, but no capability for capital generation. The Bank has a high Tier 1 capital adequacy ratio (N1.2 totaled 16.1% in early December, 2019, with the statutory minimum of 6%). This enables the Bank to withstand a significant (over 500 bps) increase in the cost of credit risk without breaching the minimum established Tier 1 capital adequacy levels. The current high capital adequacy stems from a RUB 12.8 bln non-repayable contribution by VEB.RF in August 2019 and sale of problem assets. The capital adequacy ratios fluctuated in 2019 due to capital decrease from provisioning for problem assets.

The Bank is incapable of generating capital: the averaged capital generation ratio (ACGR) has been negative in the last five years. The Bank’s operating efficiency in the last three years is assessed as low: the average cost-to-income ratio stood at around 90%, while net interest margin (NIM) was 3.6%.

The Bank’s risk profile has been upgraded from critical to weak due to the increase of provisioning coverage ratio to 93%. transfer of GLOBEXBANK’s problem assets (including non-core ones) to its balance sheet. The quality of the Bank’s loan portfolio is still assessed as low (the share of problem loans was 20.8% in the Bank's loan portfolio as of October 1, 2018, including the NPL90+ share of over 18.3% in the loan portfolio). At the same time, the Agency notes improved quality of the Bank’s assets following the sale of RUB 25 bln worth of problem assets and shares in closed-end investment funds to VEB.RF.

The Bank's market risk is assessed as moderate and its operational risk as low, while risk management system and procedures are assessed as satisfactory.

Funding and liquidity assessment is adequate. ACRA notes a satisfactory resource base concentration on the largest groups of creditors (the top ten account for 24.1% and the largest creditor for 6.9% of liabilities). In terms of sources, the Bank’s resource base is sufficiently diversified: the share of funds of individuals, the largest source of funding, equals 48% of the liabilities).

As of September 2019, the short-term liquidity shortage indicator (STLSI) was positive in the base case scenario and equaled 2.1% of liabilities in the stress scenario. In the long-term, the Bank’s liquidity position is still assessed as adequate but remains consistently close to the weak level: the long-term liquidity shortage indicator (LTLSI) totaled 53% as of September 2019.

Key assumptions

  • The Supporting Institution keeps its shareholding and operational control;
  • Сapital adequacy ratio (N1.2) is above 12% until PSB merger completion;
  • Maintaining high provisioning ratio for problem debt.

Potential outlook or rating change factors

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

A positive rating action may be prompted by:

  • Successful completion of integration and merger procedures by PSB;
  • Higher creditworthiness assessment of the Supporting Institution (SICA);
  • Lower problem debt.

A negative rating action may be prompted by:

  • Deterioration of the liquidity and funding position;
  • Substantial deterioration of capital adequacy ratios;
  • Lower level of loan loss provisions;
  • Lower potential support from the Supporting Institution.

Rating components

SCA: bb+.

Adjustments: none.

Support: SICA minus one notch.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was 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 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 Sviaz-Bank was first published by ACRA on August 29, 2017. The credit rating is expected to be revised within one year following the publication date of this press release.

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

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

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

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Mikhail Polukhin
Director, Financial Institutions Ratings Group
+7 (495) 139 03 47
Victor Antonov
Associate Director, Financial Institutions Ratings Group
+7 (495) 139 04 80, ext. 221
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