The upgrade of the credit rating of JSC "Bank DOM.RF" (the Bank) is associated with an upgrade of the capital adequacy assessment to ' strong', which reflects ACRA's opinion that the Bank's operations have become sustainably profitable. The Bank's credit rating is also driven by the adequate assessment of its business profile and satisfactory assessments of risk profile, funding and liquidity. ACRA notes a high likelihood of support to the Bank fr om its sole shareholder, JSC "DOM.RF" (the Supporting Entity, or the Group, ACRA's rating: AAA(RU), outlook Stable), in the form of equity or liquidity, which is reflected in the addition of four notches to the standalone creditworthiness assessment (SCA) of the Bank.
Key assessment factors
The adequate business profile assessment (bbb) reflects the Bank's position in the banking services market of the Russian Federation (as of October 1, 2021, the Bank was among the top 20 Russian credit institutions), as well as the medium diversification of the operating income (in H1 2021, the Herfindahl-Hirschman Index was 0.34x) that has stably grown in its volume. The Bank's strategy is focused on a rapid growth, mainly in the field of lending to construction projects and mortgages; the Bank also has plans to expand other corporate and retail services. The assessment of the quality of the Bank's corporate governance is satisfactory. Full shareholder control by the Supporting Entity makes it possible to assess the transparency of the ownership structure as high.
The assessment of the Bank's capital position has been improved to 'strong', which is backed by the average capital generation ratio (ACGR) calculated on the basis of data for 2019 and 2020, which, in turn, reflects ACRA's opinion that the Bank has achieved a sustainable profitability of its operations. In the specified period, the ACGR amounted to 120 bps. The performance in H1 2021 (the Bank's net profit amounted to RUB 6.97 bln against RUB 1.62 bln a year earlier) allows us to predict the ACGR to be stably higher than 100 bps in the future. In addition, the Agency also notes the maintenance of a high loss absorption buffer. As of September 1, 2021, the value of the N1.2 ratio was 18.59%. ACRA believes that as the business grows, the ratio will decrease, but it will remain at a comfortable level, which will also be facilitated by the additional capitalization of the Bank by the Supporting Entity. The current level of capital adequacy and the stable profitability of operations allow the Bank to withstand a significant increase in credit risks.
The satisfactory assessment of the Bank's risk profile is supported primarily by the relatively high quality of the loan portfolio. As of June 30, 2021, the share of Stage 3 loans, excluding loans granted before the control over the Bank was transferred to the Supporting Entity and well-covered by reserves, was about 2%, with the level of concentration on the ten largest groups of borrowers of about 12%. At the same time, the Agency notes that the rapid growth of lending to construction companies (the volume of which exceeded 150% of common equity) has a negative impact on the final assessment of the loan portfolio's quality. Aggressive growth rates also lim it the risk profile assessment. ACRA observes a decrease in the growth rates of the Bank's mortgage portfolio in 2021 and also notes that the growth of project financing is generally within the pre-approved limits.
The satisfactory assessment of liquidity and funding is due to the continuing high dependence of the Bank's resource base on the funds of the largest lenders, which is associated with the need to finance the rapid growth of the loan portfolio amid limited opportunities for increasing liabilities. As of June 30, 2021, the share of funds of the ten largest groups of lenders exceeds 40% of the Bank's liabilities. At the same time, the growth of funds on escrow accounts leads to a decrease in the share of liabilities to legal entities in the total funding volume. As regards the Bank's position in liquidity, the Agency notes the continuing imbalance of assets and liabilities by maturity (this is partly because the Bank is focused on long-term mortgage loans). ACRA is of the opinion that the Bank's reserve of liquid assets is sufficient for a period of up to 90 days. In 2021, the Bank's liabilities attracted from certain counterparties were extended, which strengthened the Bank's position in short-term liquidity. At the same time, taking into account that a significant volume of the Bank's resource base is formed by the shareholder's funds, ACRA assesses the liquidity shortage risk as moderate.
The degree of support to the Bank from the Supporting Entity is high due to a significant importance of the Bank for the implementation of the Group's strategy. The Bank is under the full control of the Group (the Bank and the Group actually form a single entity); therefore, a decline in the Bank's ability to continue its operations will affect the sustainability of the Supporting Entity. In addition, the Bank operates under a brand that unambiguously indicates its relationship with the Group, so that a default of the Bank would be associated with the Supporting Entity. The Agency notes that almost all of the Group's financial resources are held with the Bank, and any additional capitalization of the Bank is generally a part of the additional capitalization of the Group by the state. At the same time, the direct significance of the Bank for the state is assessed as limited.
The Bank to maintain the current business model in the next 12–18 months;
Common equity adequacy (N1.2) above 15% in the next 12–18 months;
The Bank to maintain its capacity to make sustainable profits.
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:
Stabilization of the loan portfolio's growth rate while maintaining its quality;
Lower concentration of the loan book on construction companies;
Improved balance of the Bank's assets and liabilities in terms of maturity;
Reduced dependence on the funds of the largest lenders;
Higher systemic importance of the Bank.
A negative rating action may be prompted by:
A decrease in the Bank's capitalization and a deterioration in the ability to generate capital;
Lower asset quality as a result of both an increase in non-performing loans and an increase in concentration on the largest groups of borrowers;
Lower coverage of the Bank's short-term liabilities with liquid assets;
Lower ability of the Supporting Entity to provide extraordinary support to the Bank because of the rapid growth in the scale of its operations.
Support: ACRA is of the opinion that in case of a need, the Supporting Entity will provide the Bank with extraordinary support in the form of equity and/or liquidity. Considering this, the Bank's credit rating is determined at four notches above 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 Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, the Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of JSC "Bank DOM.RF" was published by ACRA for the first time on June 13, 2017. 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 JSC "Bank DOM.RF", information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of JSC "Bank DOM.RF" and the financial statements of JSC "Bank DOM.RF" drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and JSC "Bank DOM.RF" 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 additional services to JSC "Bank DOM.RF". No conflicts of interest were identified in the course of credit rating assignment.