The credit rating of JSC “Bank DOM.RF” (hereinafter, Bank DOM.RF, or the Bank) has been upgraded due to the improvement of the business profile assessment as a result of consistent strengthening of market positions in the residential construction sector, which was driven by both the implementation of the strategy and changes to the business environment in the banking sector. The rating is also based on the strong capital position and satisfactory assessments of the risk profile and the funding and liquidity factor. In addition, ACRA notes the high likelihood of support to Bank DOM.RF from its shareholder (hereinafter, the Supporting Entity, the SE, or the Group) in the form of equity or liquidity, which is reflected in the addition of four notches to the Bank’s standalone creditworthiness assessment (SCA).
Bank DOM.RF, a specialized credit institution, is the authorized bank in the field of housing construction. The Bank is one of the 20 largest Russian credit institutions by equity and is represented in most of Russia’s federal districts.
key assessment factors
High level of support for Bank DOM.RF from the Supporting Entity. In ACRA’s opinion, if necessary the SE will provide the Bank with sufficient short-term and long-term funding and capital injections in view of the following:
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The business of Bank DOM.RF is highly important for the implementation of the Group’s development strategy;
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The SE exercises complete shareholder and operational control over the Bank, and due to this, a decline in Bank DOM.RF’s ability to continue operating in full will also impact the stability of the SE;
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The Bank and the Group operate under the same brand and therefore a default of Bank DOM.RF would be associated with the SE;
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The SE’s financial resources are currently almost fully placed in the Bank, and its additional capitalization, as a rule, is part of additional capitalization of the Group.
Taking the above into account, the credit rating of Bank DOM.RF has been set at four notches higher than its SCA.
The business profile assessment has been improved from adequate to stable (bbb+) mainly due to the continuing active strengthening of Bank DOM.RF’s market positions in both project financing and mortgage lending. At the same time, the Bank plans to broaden its activities, including by developing infrastructure construction financing. The improvement of diversification of operating income driven by higher proceeds from individual areas of business in 2021 was also a positive factor. In addition, Bank DOM.RF continues to actively work on improving its corporate governance system. The ownership structure is transparent.
Bank DOM.RF’s strong capital position stems from it maintaining capital adequacy ratios at a comfortable level, which is achieved through regular capital injections by the SE, as well as thanks to the continuing improvement of ability to generate capital. The current level of capital adequacy and stable profitability enable Bank DOM.RF to withstand significant growth of the cost of credit risk. At the same time, CTI (cost-to-income) and NIM (net interest margin) calculated by ACRA for the past three years correspond to the average for the group of peer banks.
The satisfactory risk profile assessment of Bank DOM.RF is supported primarily by the relatively high quality of the loan portfolio, which has a low share of problem debt (excluding loans granted before control over the Bank was transferred to the SE and well-covered by reserves), and low concentration on the 10 largest groups of borrowers. At the same time, ACRA notes that the significant volume of lending to construction companies and rapid growth of the loan portfolio in general continue to have a negative impact on the risk profile assessment. The level of market and operational risks is acceptable.
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 groups of lenders. At the same time, the growth of funds in escrow accounts leads to a decrease of the share of liabilities to legal entities in the total funding volume. Assessing the Bank’s liquidity position, ACRA takes into account the rather predicable nature of outflows of funds and the possibility of prolonging a number of deposits of the largest groups of creditors, including those of related parties.
Key assumptions
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Bank DOM.RF maintaining the current business model in the next 12–18 months;
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Adequacy of common equity (N1.2) above 10% in the next 12–18 months;
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The Bank maintaining its capacity to make sustainable profits
Potential outlook or rating change factors
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Stabilization of the loan portfolio’s growth rate while maintaining its quality and/or a significant decline of the share of loans issued to construction companies in the portfolio;
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Lower dependence of the resource base on funds of the largest groups of creditors and maintaining the balance of the Bank’s assets and liabilities in terms of maturity.
A negative rating action may be prompted by:
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Lower ability of the SE to provide extraordinary support to Bank DOM.RF because of rapid growth in the scale of its operations;
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Lower capitalization of the Bank and/or deterioration of its ability to generate capital;
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Lower asset quality as a result of an increase of non-performing loans and/or an increase of concentration on the largest groups of borrowers;
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Deterioration of liquidity and/or funding position.
RATING COMPONENTS
SCA: а-.
Adjustments: none.
Support: ACRA is of the opinion that if necessary, the Supporting Entity will provide the Bank with extraordinary support in the form of equity and/or liquidity. Taking this into account, the Bank’s credit rating is set at four notches above the SCA.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
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, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the 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 data provided by JSC “Bank DOM.RF”, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated 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 were, 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 discovered in the course of credit rating assignment.
