The credit rating of PJSCB «DERZHAVA» (hereinafter, the Bank) has been affirmed at BBB-(RU) to reflect ACRA’s base case expectations that over the next 12 to 18 months the Bank will continue adhering to the current business model, while maintaining adequate capitalization and profitability indicators, as well as stable liquidity metrics.
The Negative outlook reflects ACRA’s opinion on the risks of further deterioration of the credit quality of the loan portfolio and takes into account a possible decline in the quality of the guarantee portfolio amid a challenging operating environment.
The Bank is a small Moscow-based bank that focuses on bank guarantees, transactions in securities and, to a lesser extent, lending to individuals and small and medium-sized enterprises. As of November 1, 2020, the Bank ranked 95th in terms of capital and 110th in terms of assets among Russian banks. The controlling beneficiary shareholder of the Bank is S. L. Ents (about 99.5% of shares); the remaining minority stake belongs to V. Y. Polyakov.
Key rating assessment factors
The business profile assessment is bb+. The Bank has a relatively diversified income structure, with commission income generated mainly by issuing bank guarantees for government contracts usually accounting for more than 40% of operating revenues. The remaining part is made up of interest income relatively evenly distributed between the loan portfolio and the securities portfolio.
The Bank has occupied a relatively stable position in the guarantee segment for a number of years. This area will continue to be of key importance to the Bank over the next 12 to 18 months. However, ACRA notes that the Bank’s small size makes it sensitive to increasing competition with larger players.
Although the loan portfolio is only a small portion of the Bank’s business, in ACRA’s opinion, risk management for this asset category is rather aggressive and may lead to unforeseen losses in the future. In particular, these risky assets form around 75% of the loan portfolio — the part which has been provided to individuals and is secured by real estate.
Adequate capital adequacy assessment. ACRA expects the Bank to maintain its adequate capitalization indicators thanks to relatively high business profitability and despite relatively high expected growth of the guarantee portfolio by 20–25% from the start of October 2020 until the end of next year. According to ACRA’s assessments, the N1.2 ratio will be maintained at no lower than 9% over the next 12 to 18 months (as of November 1, 2020 the ratio stood at 12.1%), and return on equity will fall no lower than 15–20% (for comparison, over the past five years this indicator has amounted to around 24% annually per IFRS).
ACRA notes that the one-off significant improvement of the N1.2 ratio at the start of this year was largely the result of regulatory changes to accounting guarantees in the calculation of prudential capital metrics rather than fundamentally more favorable leverage ratios or a less risky profile of assets and off-balance sheet credit commitments. In addition, ACRA notes a stable trend toward declining capital adequacy indicators over the first ten months of 2020, which constrains the assessment of this sub-factor.
Satisfactory risk profile assessment. The worsening quality of the loan portfolio puts pressure on the risk profile assessment, and despite its relatively small size, it places significant pressure on capital. According to ACRA’s assessments, the share of potential problem loans amounts to around 40–45% of the total portfolio and almost 40% of the Bank’s common equity. For comparison, a year earlier these shares were approximately one-and-a-half to two times smaller. The bulk of potential problem loans is concentrated on loans provided to individuals under pledge of real estate.
ACRA calculates that the share of potential problem guarantees may total up to 1% of the portfolio or 7.5% of common equity. The Bank’s portfolio of securities primarily consists of bonds issued by high credit quality issuers.
Adequate funding and liquidity position. The lion’s share of the Bank’s balance sheet (around 80% as of the end of September 2020) was made up of relatively liquid assets, which provides for comfortable liquidity management. At the same time, ACRA notes the relatively high concentration of the funding base.
- Maintaining the Bank’s current business model;
- Maintaining the N1.2 CAR over 9% within the 12 to 18-month horizon.
Potential outlook or rating change factors
The Negative outlook assumes the possibility of a negative rating action over the next 12 to 18-months.
A positive rating action may be prompted by:
- Significant improvement of the quality of the guarantee and loan portfolios;
- Growth of N1.2 to a level consistently above 12%.
A negative rating action may be prompted by:
- Deterioration of asset quality and off-balance sheet claims;
- N1.2 falling and consistently remaining below 9%;
- Weaker business profile due to strong competition or other factors.
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 Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of PJSCB «DERZHAVA» was published by ACRA for the first time on December 29, 2017. The credit rating of PJSCB «DERZHAVA» 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 PJSCB «DERZHAVA», information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of PJSCB «DERZHAVA» and the financial statements of PJSCB «DERZHAVA» drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and PJSCB «DERZHAVA» participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by PJSCB «DERZHAVA» in its financial statements have been discovered.
ACRA provided no additional services to PJSCB «DERZHAVA». No conflicts of interest were discovered in the course of credit rating assignment.