The credit rating of “AVANGARD” JSB (hereinafter, AVANGARD, or the Bank) is based on the Bank’s satisfactory business profile assessment, adequate capital adequacy, critical risk profile, and adequate funding and liquidity position.
AVANGARD is a private bank operating a wide branch network that spans all of Russia’s federal districts. It was among the 60 largest Russian credit institutions in terms of capital as of April 1, 2024. The Bank focuses on SME lending (predominantly in the agribusiness and manufacturing sectors), stock market and interbank market operations, and transactional business.
KEY ASSESSMENT FACTORS
Satisfactory business profile (bbb-). The Bank’s strategy provides for lowering the risk appetite coupled with maintaining a high level of liquid assets on the balance sheet while retaining the current volumes of the loan and trade portfolios, which is due to consistent heightened operating environment risks. The Bank continues to broaden its remote services, open new express offices, and improve its technological infrastructure. The Agency notes the acceptable diversification of operating income, which in turn stems from the equal shares of interest, commission and foreign currency revenues. At the same time, the share of interest income from placing funds is demonstrating growth.
ACRA assesses the Bank’s corporate governance quality as satisfactory and matching the scope of its business. At the same time, the majority shareholder actively participates in resolving strategic and most of the significant operating matters.
The Bank’s adequate capital position is determined based on it maintaining high capital adequacy metrics (N1.2 was 17.3% as of May 1, 2024, while the average for the past 12 months is 16.2%), which indicates the Bank’s ability to withstand an increase in the cost of risk by more than 500 bps. At the same time, internal capital generation capacity calculated for the past five years has turned negative amid creation of major IFRS reserves for frozen assets on the one hand, and a loyal dividend policy on the other. The Bank’s CTI and NIM for the past three years correspond to market averages.
The critical risk profile assessment is based on both the low quality of the loan portfolio, the share of which remains below 20% of assets, and the risks of recognizing losses on investments in debt obligations of non-residents according to Russian accounting standards.
The Bank’s risk profile assessment is also negatively affected by other balance sheet assets, including real estate, which are subject to value change risks.
The loan portfolio quality is low because of a high share of non-performing loans and potential non-performing loans and high, continuing growth of concentration on the largest groups of borrowers (the ten largest borrowers accounted for 75% of the portfolio as of January 1, 2024). The volume of Stage 3 loans under IFRS 9 as of the end of 2023 had declined due to the write-off of non-preforming loans. Nevertheless, the volume of these loans amounted to 12.6% amid the declining size of the loan portfolio vs. 9.7% a year earlier.
Risk management quality is assessed as satisfactory.
Adequate funding and liquidity position. Thanks to a considerable volume of liquid assets, the Bank demonstrates excess short-term liquidity in both the base case and stress scenarios of ACRA. Long-term liquidity is also strong, which is a result of the Bank’s high capitalization. Regulatory liquidity ratios are met with a margin of safety — as of May 1, 2024, the N2 ratio was 33.9% and the N3 ratio was 89.7%.
The share of the largest source of funding in the form of corporate funds was 74.4% as of January 1, 2024. The concentration on the largest group of lenders and the 10 largest groups of lenders is assessed as moderate.
Key assumptions
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Maintaining the current business model within the 12 to 18-month horizon;
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Maintaining Tier 1 capital adequacy (N1.2) above 12% within the 12 to 18-month horizon;
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Share of the loan portfolio not exceeding 20% of total assets within the 12 to 18-month horizon.
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:
- Much better quality of the Bank’s assets, including both financial instruments and the loan portfolio.
A negative rating action may be prompted by:
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Significant financial support for the Bank’s affiliates;
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Significantly weaker diversification of operating income;
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Significant decline in capital adequacy ratios and operational efficiency;
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Significant deterioration of asset quality;
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Lower liquidity and higher concentration of the resource base on the largest lenders.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb+.
Adjustments: none.
Support: none.
Issue ratingS
“AVANGARD” JSB, exchange-traded interest-bearing non-convertible certificated bearer bonds, BO-001P-02 series (RU000A1007Q1); maturity date: February 28, 2029, issue volume: RUB 3 bln — BB+(RU).
Rationale. The issue represents senior unsecured debt of “AVANGARD” JSB. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of “AVANGARD” JSB, i.e., BB+(RU).
Regulatory disclosure
The credit ratings have been assigned to “AVANGARD” JSB and the bond issue of “AVANGARD” JSB (RU000A1007Q1) 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 Methodology for Assigning Credit Ratings to Financial Instruments under the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit rating of “AVANGARD” JSB and the credit rating of the bond issue (RU000A1007Q1) of “AVANGARD” JSB were published by ACRA for the first time on September 28, 2017 and March 28, 2019, respectively. The credit rating and its outlook, as well as the credit rating of the bond issue, are expected to be revised within one year following the publication date of this press release.
The credit ratings were assigned based on data provided by “AVANGARD” JSB, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the consolidated IFRS financial statements of “AVANGARD” JSB and the financial statements of “AVANGARD” JSB drawn up in compliance with Bank of Russia Ordinance No. 6406-U dated April 10, 2023. The credit ratings are solicited and “AVANGARD” JSB participated in their assignment.
In assigning the credit ratings, 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 “AVANGARD” JSB. No conflicts of interest were discovered in the course of credit rating assignment.
