The credit rating assigned to JSCB “Moscow Industrial bank” PC (hereinafter, MInBank, or the Bank) is based on its satisfactory business profile, weak capital adequacy, critical risk profile, and adequate liquidity and funding positions. Other factors that contribute to the credit rating include MInBank’s moderate systemic importance and the strong influence of the state on its creditworthiness.
MInBank is a medium-sized bank in terms of capital (among the 50 largest Russian banks) that operates a broad national branch network. From January to October 2019, the Bank was managed by a temporary administration. The Bank of Russia holds a 100% share in the Bank (which is held in a trust by Limited Liability Company Fund of Banking Sector Consolidation Asset Management Company).
Key rating assessment factors
The state’s influence on the Bank’s creditworthiness is assessed as strong in view of the following: 1) the Bank of Russia is exercising shareholding control over the Bank; 2) previously, the Bank was financially supported by the Bank of Russia through a RUB 128.7 bln recapitalization in July 2019 and a RUB 40 bln liquidity injection in Q1 2019 to support the Bank’s operations.
The systemic importance of the Bank is assessed as medium, taking into account the limited role played by MInBank in supporting certain sectors of the economy, living standards and budget revenues. On the other hand, the Bank holds sufficiently strong positions in the retail and SME funding segments in certain regions of Russia.
In view of the above, ACRA has added two notches to the Bank’s standalone creditworthiness assessment (SCA) when determining the credit rating of MInBank.
The satisfactory business profile assessment (bbb-) is determined by the market position held by the Bank in the Russian banking system and the universal character of its operations (the Herfindahl–Hirschman Index is 0.22). It is expected that the Bank’s new strategy will pursue the goal of developing the Bank as a universal credit institution, without aggressive growth in any areas of business. The quality of corporate governance matches the scope of the Bank’s business.
Weak capital position. Since the Bank’s recapitalization in July 2019, its N1.2 common capital adequacy ratio has fallen from 15.2% as of August 1, 2019 to a moderate 10.2% as of July 1, 2020 due to the expansion of the Bank’s operations and a certain allocation of additional reserves for distressed assets. However, part of the problem loans (2x capital) are not completely covered by reserves. In ACRA’s opinion, the risks related to this are mitigated by the possibility of the Bank providing support to the regulator, and also the planned sale of existing collateral. The Bank’s operating efficiency is low due to the financial rehabilitation procedure and operational transformation in 2019. However, MInBank plans to actively improve its CIT and NIM by achieving positive financial results in the short-term.
The risk profile assessment is critical. This is due to the low quality of the loan portfolio (29% of assets), as the share of potentially problem loans in the portfolio is still very high (as of March 31, 2020, this share exceeded 50%, including NPL90+ at 45%) and the loan portfolio is highly concentrated on the largest groups of borrowers (over 25% of the portfolio, most of which are associated with ex-shareholders of the Bank), and on high-risk industries (about 2.6x of common capital is loans granted to construction and real estate companies). In addition, ACRA notes that the Bank’s overdue loans are mostly covered by reserves (more than 80%). The volume of investments in non-core assets and subsidiaries and affiliates is heightened (16% of common capital). However, in the course of financial rehabilitation of the Bank, such assets will gradually vanish from the Bank’s balance sheet. The credit quality of the securities portfolio (15% of assets) is high and the level of market risk is moderate (69% of common capital). However, in Q2 2020, the Bank decided to use funds previously held in Bank of Russia accounts to purchase securities, and this contributed to a significant increase in accepted market risk.
The Bank’s risk management function is satisfactory.
Adequate liquidity position. ACRA assesses MInBank’s ability to fulfill its obligations on the 90-day horizon as strong, since the Bank demonstrates excess short-term liquidity in the base case scenario and a minor deficit in the stress scenario. The long-term liquidity shortage indicator, LTLSI, stood at an acceptable level of 61% as of March 31, 2020. In the next 12 months, the Bank is expected to experience a liquidity outflow of around RUB 22 bln (8.5% of liabilities as of July 1, 2020; the amount was granted by the Bank of Russia to support liquidity), however, if necessary this amount can be replaced by client funds.
Satisfactory funding profile. The Bank’s funding base mainly includes deposits held by individuals (72% of liabilities as of March 31, 2020), and, consequently, there is no pronounced concentration on specific clients, with the ten largest groups of creditors, including CCP NCC (AAA(RU), outlook Stable), accounting for 9.1% of liabilities.
- The state retaining its shareholding control over the Bank;
- Capital and/or liquidity from the state if necessary;
- Maintaining the current business model.
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:
- Material decline in the share of problem loans and decline in the share of non-core assets on the Bank’s balance sheet;
- Capital adequacy ratios increasing based on profit generation;
- Significant improvement in operating efficiency.
A negative rating action may be prompted by:
- Loss of the shareholding control over the Bank by the state;
- Material deterioration in the Bank’s capital position;
- Increase in the concentration on the largest groups of creditors and/or a decline in the liquidity position.
Support: state support, +2 notches to the SCA.
No outstanding issues have been rated.
The credit rating has been assigned under the national scale for the Russian Federation based on the Methodology for Analyzing Relationships Between Rated Entities and the State and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In order to determine certain factors of the standalone creditworthiness assessment, the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation was applied.
The credit rating of JSCB “Moscow Industrial bank” PC was published by ACRA for the first time on August 12, 2019. 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 JSCB “Moscow Industrial bank” PC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of JSCB “Moscow Industrial bank” PC and statements of JSCB “Moscow Industrial bank” PC composed in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and JSCB “Moscow Industrial bank” PC participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSCB “Moscow Industrial bank” PC in its financial statements have been discovered.
ACRA provided additional services to JSCB “Moscow Industrial bank” PC. No conflicts of interest were discovered in the course of credit rating assignment.