The credit rating of PJSC Kuznetsky Bank (hereinafter, Kuznetsky Bank, or the Bank) has been upgraded to reflect the improvement of the Bank’s risk profile assessment from weak to satisfactory, while the limited business profile assessment, satisfactory capital adequacy, and adequate funding and liquidity position remained unchanged.
The Positive outlook is based on the possible improvement of Kuznetsky Bank’s risk profile assessment if the volume of non-core assets on the Bank’s balance sheet continues to fall amid a continued low share of non-performing and potential non-performing loans in the portfolio over the 12 to 18-month horizon.
Kuznetsky Bank is a universal regional bank with a basic license that operates primarily in the Penza Region. The Bank’s main areas of business are financing and providing guarantees to SMEs, as well as lending to the public (mainly consumer lending and mortgage lending). In carrying out its operations, the Bank mainly attracts client funds. In addition, the Bank is actively developing its transaction business.
Key assessment factors
Kuznetsky Bank’s limited business profile assessment (bb) is primarily based on its market position in the Russian banking sector. However, due to the universal nature of the Bank’s business model, ACRA assesses operating income diversification as consistently high (the Herfindahl-Hirschman index for the first nine months of 2023 was 0.16). Kuznetsky Bank’s strategy is consistent with macroeconomic trends and assumes the further development of existing business lines.
The capital adequacy assessment remains satisfactory due to the Bank consistently maintaining its N1.2 capital adequacy ratio at an adequate level (around 10% over the past 12 months and 9.2% as of December 1, 2023), which allows the Bank to withstand an increase in the cost of risk of 300–500 bps. At the same time, the capacity to generate capital is also assessed as adequate (the averaged capital generation ratio (ACGR) calculated for the past five years was 120 bps). CTI (cost-to-income) and NIM (net interest margin) calculated by ACRA for the last three years were 72% and 6%, respectively.
The Bank’s risk profile assessment has been improved from weak to satisfactory mainly due to the volume of accepted market risk declining to 55% of common equity as of October 1, 2023 (this indicator has averaged around 60% over the past 12 months), primarily as a result of the reduction in the time to maturity of the securities portfolio. In addition, the quality of Kuznetsky Bank’s loan portfolio (61% of assets) continues to improve due to a reduction in the share of non-performing and potential non-performing debt to 3.8% at the same time as the Bank maintaining the portfolio’s low concentration on the ten largest groups of borrowers (around 21%) and companies in high-risk industries (48% of common equity) as of October 1, 2023. The credit quality of the portfolio of contingent liabilities is assessed as sufficiently high. The volume of non-core assets, mainly investment real estate received as compensation amounted to around 8% of common equity as of October 1, 2023. The quality of the Bank’s risk management system is satisfactory.
Adequate funding and liquidity position. Kuznetsky Bank is able to withstand an outflow of client funds in both ACRA’s base case and stress scenarios. The short-term liquidity shortage indicator was adequate, while the long-term liquidity shortage indicator exceeded 85% as of October 1, 2023. We still do not observe an increased concentration of the resource base on the largest source, while the Bank’s dependence on the largest groups of lenders is still low. The share of related-party funds (including subordinated deposits) is low, and the volume of funds raised from the regulator is insignificant.
KEY ASSUMPTIONS
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Pursuing the current business model within the 12 to 18-month horizon;
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Maintaining NIM at around 7–8%;
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Maintaining an adequate capital adequacy ratio (N1.2) within the 12 to 18-month horizon.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will highly likely be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
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Significant increase in capital adequacy, no decrease in capital generation, and growth of operational efficiency;
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Maintaining a rather low share of non-performing loans and low portfolio concentration on the largest groups of borrowers;
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Further reduction of non-core assets.
A negative rating action may be prompted by:
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Lower capital adequacy ratios and/or capital generation;
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Significant increase in the share of non-performing loans and/or higher concentration of the portfolio on the largest groups of borrowers;
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Volume of accepted market risk exceeding the threshold 75% of equity capital;
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Deterioration in liquidity and/or funding position.
Rating components
Standalone creditworthiness assessment (SCA): bb.
Adjustments: none.
Support: none.
Issue ratings
There are no outstanding issues.
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 and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of PJSC Kuznetsky Bank was published by ACRA for the first time on May 22, 2020. 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 PJSC Kuznetsky Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the financial statements of PJSC Kuznetsky Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited and PJSC Kuznetsky Bank 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 no additional services to PJSC Kuznetsky Bank. No conflicts of interest were discovered in the course of credit rating assignment.
