The affirmation of the credit rating of Bank VENETS (hereinafter, the Bank) reflects the base case expectations of ACRA that, in the next 12–18 months, the Bank will continue its operations while maintaining the current capital and liquidity metrics as well as remaining under pressure fr om reputational risks associated with the insolvency procedure carried out in respect of a key asset held by one of the owners of the Bank (significant tax claims against Zavod Trekhsosensky LLC).
The Negative outlook has been maintained, which is associated with alternative negative scenarios wh ere ACRA sees the risks of deteriorating capital adequacy and profitability metrics, unless the Bank is able to maintain its common capital adequacy ratio sustainably higher than 12% (the threshold set forth in ACRA's methodology) in the next 12–18 months, and the profitability under IFRS will remain sustainably negative in 2021–2022. Negative alternative scenarios also include a weakening risk profile in case the Bank continues to increase its exposure to the construction and real estate segment to levels consistently exceeding the values of common capital, or the Agency sees signs of an increase in the share of non-performing loans above 25% or a significant growth in the market risk appetite. In addition, the Negative outlook reflects the risks of a worst-case scenario in the 12–18 month horizon, in which there may be negative intervention by owners or regulatory authorities in the Bank's operations amid tax proceedings in relation to a key asset of one of the owners.
The Bank is controlled by a group of shareholders, headed by D. A. Ryabov, who hold around 47% of its equity. Broadly similar stake is held by L. R. Rodionova and her ex-husband M. Y. Rodionov, whose shares were transferred to D. A. Ryabov for asset management. The remaining stake in the Bank is owned by minority shareholders.
Key assessment factors
The extremely low business profile assessment (b-) is due to, primarily, the oversight procedure introduced as part of the insolvency (bankruptcy) proceedings and ongoing disputes with the Federal Tax Service with respect to Zavod Trekhsosensky LLC (the key asset of M. Y. Rodionov). ACRA is of the opinion that these proceedings and claims may ultimately have a negative impact on the stability of the Bank’s business, weaken its ability to attract and retain customers and generate a stable financial result; they also may result in a closer regulatory attention and reputational risks.
The Bank is a small regional financial institution focused on corporate lending in the Ulyanovsk Region. As of August 1, 2021, the Bank ranked 227th in capital. Regardless the Bank's moderate positions, ACRA notes its relatively well-established regional brand. Currently, the Bank's management considers possibilities for more active expansion outside the Ulyanovsk Region.
Adequate capitalization and profitability assessment is affirmed, although remains under pressure. The affirmation is explained by the Agency's expectations for the N1.2 ratio to recover above 12% in the next 12–18 months (11.7% as of September 1, 2021) and a significant foreseeable increase in the current extremely low profitability indicators demonstrated by the Bank in H1 2021 (the net loss on average capital amounted to 34% in annual terms for the specified period, and the annualized cost of risk was 8% of the average loan book). ACRA's expectations for profitability and recovery of N1.2 above 12% are based on the projected owners' support, and they should materialize by the end of 2021 thanks to the planned one-off income from cash sales of non-performing claims to related party companies. Keeping N1.2 above 12% in 2022 will depend on the Bank's risk appetite (including plans for business growth and exposure to market risk), which, according to ACRA's base case expectations, will be moderate in order to maintain adequate loss absorption capacity.
Another constraining factor is the low efficiency of Bank’s operations, with the CTI ratio for the past three full years amounting to 85%. ACRA expects the three-year average CTI to be maintained at above 75% over the next 12–18 months.
The weak risk profile. According to the Agency's estimates, the share of potentially problem assets is about 20% of the total loan portfolio. In addition, the volume of loans granted to the construction industry, which, in ACRA's opinion, is associated with additional risks, is currently comparable to the amount of the Bank's common equity. The management has plans to reduce this volume over a 12–18 month horizon, which is an important assumption for maintaining the current risk profile assessment.
The high concentration of the Bank’s loan portfolio on individual counterparties (the 10 largest borrowers accounted for a 43% share as of July 1, 2021) continues to be a notable rating constraint. A stronger focus of the Bank on equity investments, which may lead to enhanced volatility of capital ratios, also has the potential to trigger downgrade of the score for the entire section. The current portfolio of such equity securities is approximately RUB 350 mln, while the market risk associated with these investments and taken into account in capital adequacy ratios is about RUB 800 mln, which is explained by the specifics of its calculation.
Adequate funding and liquidity position. The Bank is able to withstand a significant outflow of client funds in both ACRA’s scenarios, base and stress cases. There are also no term imbalances between assets and liabilities over the longer-term periods.
ACRA expects retail deposits to continue to be the Bank’s main source of funding, the share of which ranged from 60% to 80% of liabilities over the past three years, depending on corporate account outstanding amounts. The volatility of the latter is a result of the occasionally changing volumes of funds held by affiliated companies. However, ACRA does not view this as a critical risk factor for funding due to the Bank’s relatively balanced liquidity management policy. In particular, ACRA assesses that liquid assets (cash and its equivalents and claims to the Bank of Russia and the interbank exposures) covered about 34% of client funds as of mid-2021. A similar indicator, which excludes funds from affiliates, indicates coverage of 19% of clients’ funds. These indicators, although still relatively comfortable, showed significant negative dynamics over the past year, which is explained by the volatility of the fund balances on accounts of the largest group of depositors related to the Bank.
Under the base-case scenario, the Bank continues to operate as a going concern after legal proceedings and tax claims with regard to Zavod Trekhsosensky LLC are settled;
N1.2 ratio not below 12% in the next 12–18 months;
Maintaining a positive 5-year average CAGR in the next 12–18 months in view of the expected recovery of significant impairment reserve created in H1 2021.
Potential outlook or rating change factors
The Negative outlook assumes a probability of a rating deterioration within the 12 to 18-month horizon.
A positive rating action may be prompted by:
Non-performing loans at consistently lower than 15% of the loan portfolio amid stabilization of the share of the ten largest borrowers at lower than 40%;
Consistently maintaining the three-year average CTI below 75%;
No uncertainty or serious negative consequences for the Bank from the tax dispute of Zavod Trekhsosensky LLC.
A negative rating action may be prompted by:
A negative 5-year average CAGR in the next 12–18 months, in particular, if the Bank fails to restore a significant amount of reserves created in H1 2021;
Further growth in non-performing loans or a more aggressive than expected development strategy resulting in the N1.2 ratio sustainably below 12%;
Increased volume of lending to the construction and real estate segment;
ACRA's opinion on the Bank’s growing vulnerability to the market risk;
Realization of the worst-case scenario entailing severe consequences stemming from the legal proceedings regarding Zavod Trekhsosensky LLC, which negatively impacts the Bank’s financial standing and/or creates what ACRA views as critical reputational and regulatory risks for the Bank;
Signs of decreased stability of the Bank’s funding base, which may lead to a critical deterioration of the liquidity position.
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 Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of Bank VENETS was published by ACRA for the first time on November 6, 2018. 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 Bank VENETS, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of Bank VENETS and the financial statements of JSC Bank VENETS drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Bank VENETS participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services Bank VENETS. No conflicts of interest were discovered in the course of credit rating assignment.