The credit rating of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) (hereinafter – Bank Otkritie, the Bank) is determined by its stable business profile, and adequate capital adequacy. Significant pressure on the Bank’s creditworthiness is exerted by low quality of its loan portfolio and by possible negative influence on the part of the holding company on the Bank’s liquidity and capital adequacy. The Bank is marked by a moderate systemic importance for the Russian banking system.
Bank Otkritie is one of Russia’s largest universal financial institutions that specializes primarily in corporate lending. Its largest shareholder is Otkritie Holding JSC.
Key rating assessment factors
Business profile is characterized by the Bank’s stable franchise, predominantly in the area of corporate lending, and a relatively good operating income diversification. The Bank owns a vast branch network and has a regional presence in all large regions of the Russian Federation.
Historically, the Bank's strategy mirrors the development strategy of Otkritie Holding JSC, which conditions the Bank's participation in transactions related to acquisition of other credit institutions, which forms the risk of volatility in the Bank's business. At the same time, in the long term, the Bank intends to concentrate on organic growth, which can have a positive impact on its business profile.
The Bank’s capital adequacy is assessed as adequate. Bank Otkritie is able to maintain a Tier-1 capital adequacy safety margin (at year-end 2016, IRFS Tier-1 amounted to 12.3%) as well as to comply with the Bank of Russia capital adequacy requirements due to participation in federal capital injection programs. In accordance with ACRA stress testing, the Bank's capital is able to absorb a significant increase in the cost of risk without violating the regulatory capital adequacy standards. At the same time, the Bank’s own ability to generate new capital remains rather weak (24 bps on average for 2014-2016), which reflects both, low net interest margin (1.2% in 2016), and heightened cost of risk over the last several years.
The Bank’s risk profile takes into account low quality of its loan portfolio: as of year-end 2016, under the Bank’s IFRS statements, the share of problem loans overdue by 90+ days amounted to 15.0% of the total loan portfolio without REPO transactions, or 7.5% with their account. The total volume of loans with signs of impairment, classified by the Bank as doubtful and non-standard, amounted to 20.0% of the total loan portfolio without REPO transactions, or 10.0% with their account. In addition, risk profile assessment takes into account a certain asset concentration on high-risk industries, in particular, loans and bonds of construction companies and developers exceed 100% of Tier-1 capital (IFRS).
ACRA would like to point out that a significant volume of market risk that significantly exceeds the Bank’s core capital exerts additional downward pressure on the risk profile assessment. Although the Bank's securities portfolio is generally characterized by sound credit quality and diversification, a likely market risk materialization in case of high volatility on the Russian financial market may have a negative impact on the Bank's profitability and capital.
Liquidity and funding position is assessed as adequate: The bank demonstrates a surplus of short-term liquidity both, in ACRA’s base case and in stress scenarios. A key role for the liquidity position is played by a large unencumbered portfolio of highly liquid debt securities. Long-term liquidity is characterized by an adequate margin for covering liabilities with assets of the relevant maturity.
Concentration of the Bank’s funding base remains low, as the share of the largest creditor in its liability structure (net of the Bank of Russia’s funding) does not exceed 5%.
Moderate systemic importance of Bank Otkritie coupled with weak assessment of the parent company creditworthiness. The Bank's rating takes into account its moderate systemic importance for the Russian banking system. With due consideration of the volume of accumulated assets and nationwide presence, a bankruptcy of Otkritie Bank can be a source of problems for Russia’s banking system and grounds for receiving external support.
At the same time, the Bank’s rating takes into account creditworthiness of the Bank’s supporting organization (Otkritie Holding JSC), which was assessed by ACRA as weak. In this regard, the Bank's possible participation in acquisition of new assets by Otkritie Holding JSC and providing the latter with other financial support may lead to weakening of the Bank's liquidity position and capital adequacy.
Key assumptions
- Cost of credit risk within 3–4%;
- Tier-1 capital adequacy (N1.2) over 8% on the 12 to 18-month horizon;
- Moderate increase in diversification of the loan portfolio and sources of income;
- Retaining the current funding structure.
Potential outlook or rating change factors
A positive rating action may be prompted by:
- Significant improvement of profitability pertaining to the Bank's operations, which can lead to a long-term improvement of own capital generation indicators;
- Improvement of the loan portfolio quality, in particular, decline of the problem loans volume, as well as reducing assets concentration on high-risk industries, in particular, on construction and development;
- Change in asset structure that will lead to decrease of market risk to Tier-1 capital.
A negative rating action may be prompted by:
- Increased cost of risk resulting from recognized impairment of problem loans in portfolio, which will exert a tangible-for-rating pressure on Tier-1 capital adequacy;
- Increased volume of the Bank’s funding provided to the parent company to sustain the latter’s operations.
Rating components
Standalone creditworthiness assessment (SCA): bbb-.
Adjustments: systemic importance: +2 notches; Group influence assessment: -2 notches.
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, 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.
A credit rating has been assigned to «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (June 29, 2017).
The assigned credit rating is based on the data provided by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) and statements of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in its financial statements have been discovered.
ACRA provided an additional service to «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.
Disclosure of deviations from approved methodologies. (1) The Bank’s SCA was adjusted by two notches due to the ACRA’s assessment of the risk of liquidity outflow that may be caused by the possibility of the Bank rendering support to the other members of the Otkritie Holding group, as significant and exceeding the highest adjustment allowed by the ACRA methodology. (2) High market risk is mitigated by a significant share of high-quality securities in the securities portfolio; hence, a one-notch positive adjustment pertaining to market risk was applied.
