The upgraded credit rating of BANK “ROSSIYSKY CAPITAL” (PJSC) (hereinafter – RosCap, or the Bank) reflects a significant improvement of standalone creditworthiness assessment of the Bank with respect to both risk profile and funding. Positive changes in the Bank’s risk profile reflect a substantial improvement in its asset quality: a major portion of problem loans in the Bank’s portfolio were acquired by the Deposit Insurance Agency (DIA), and as to the rest of problem loans, loan loss provisions covering them in full were created by virtue of capital injections by the government. Reduction of share of the largest clients in liabilities contributed, in turn, to the Bank’s funding profile improvement.

BANK “ROSSIYSKY CAPITAL” (PJSC) was established in 1994. Following significant difficulties amid financial crisis, the Bank was put into financial rehabilitation program. In 2009, DIA took the role of the Bank’s turnaround manager and main shareholder, while the Bank started operating under the long-term Financial Rehabilitation Plan (FRP). It was planned to create a bridge bank for insolvent banks based on RosCap. As part of this plan, the Bank took over “Gubernsky bank “Tarkhany”, OJSC “Commercial Bank “Potential”, OJSC “Commercial Bank” “Ellips Bank”, and integrated a sanated “Socinvestbank”. Since end-2015, the Bank has also taken part in completion of SU-155 construction projects. It is expected that the Bank will become part of JSC AHML (Unified Institution for Development of the Housing Sector, DOM.RF).

Key rating assessment factors

Significant probability of extraordinary support from government agencies reflects the Bank’s medium systemic importance coupled with very high state influence. RosCap’s systemic importance translates into consequences of its potential default, which may lead to the failure of confidence to the Russian banking sector, especially to state-owned banks, to certain federal budget losses, and notable reputational risks for the government.

RosCap’s sole owner and shareholder is the Government of the Russian Federation (directly now, in future via JSC AHML that will exercise complete shareholding and operating control over the Bank). ACRA notes multiple cases of the Bank’s capital replenishment by state performed in the framework of the FRP: in 2015–2016, the volume of capital infusions exceeded RUB 39 bln; in 2017, the Bank received additional RUB 15 bln. The government has instruments for supporting the Bank via ruble and currency liquidity injections via the Federal Treasury.

RosCap’s business profile (bbb-) is assessed as moderate and it takes into account the specifics of the Bank’s franchise: RosCap is among the largest Russian credit institutions and, after its transfer to JSC DOM.RF, is expected to be converted into the anchor bank of DOM.RF group focused on financing mortgage lending and providing project finance in the residential construction sector. The Bank’s business profile takes into account a moderate level of its operational diversification: the Herfindahl–Hirschman Index used by ACRA to assess operating income diversification stood at 0.30 as of end-2016.

The Bank’s management quality is assessed as satisfactory. Such subfactor of business profile assessment as ownership structure and reputation is high. RosCap’s ownership structure is transparent, and reputational risks are low.

Capital adequacy of the Bank is assessed as weak driven by moderate regulatory capital adequacy ratios amid persisting low operational efficiency of its activities. The regulatory core capital adequacy ratio (N1.2) stood at 10.0% as of November 1, 2017 vs 10.3% as of January 1, 2017; however, ACRA notes a substantial qualitative improvement of this indicator. Previously, the N1.2 ratio was maintained at the required level owing to the fact that allowances to provisions were regulated by the Plan for DIA participation in the Bank’s rehabilitation, and they differed from provisioning amounts as required by the Russian law. After a major share of problem loans was sold to DIA, and provisions thereunder were recovered, while government injected additional capital to the Bank, capital adequacy ratio is assessed as realistic and reflecting its increased capability to absorb potential losses.

At the same time, operational efficiency indicators of the Bank remain low. In particular, net interest margin (NIM) averaged around 0.5% for the last three years, according to ACRA estimates, which is significantly below the industry averages (estimated by ACRA at 4.8%). The Agency also takes into account the probability of a regulatory requirement to create additional provisions with respect to a deal made by the Bank with a counterparty of high credit quality, which may affect its capital adequacy ratios; however, the probability of such risk to materialize is assessed as low.

Satisfactory risk profile assessment of the Bank reflects the sale of the major share of problem assets to DIA at book value, which enabled recovery of provisions covering those loans, and increased the share of loans generating interest income. Problem loans remaining on the Bank’s balance sheet (classified into the fourth and fifth quality category under RAS) were fully provisioned in compliance with the Russian legislation. At the same time, a certain number of potentially problem borrowers remain in the loan portfolio of the Bank, with their share in the total loan portfolio below 10%, according to ACRA estimates.

The expected increase in concentration on industries associated with high risk for lending (construction and real estate transactions) exerts a downward pressure on the Bank’s risk profile: in addition to mortgage lending, the Bank will focus on project financing in the construction sector.

Adequate liquidity and funding position is defined by a substantial short-term liquidity surplus of the Bank, its low dependence on regulatory funding, and low concentration of funding on the largest clients.

Key assumptions

  • Transfer of the Bank under JSC AHML’s control in the short term;
  • Tier-1 capital adequacy at or above 8% within the 12-month horizon.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely be upgraded within the 12 to 18-month horizon due to several factors including the Bank’s operational integration into JSC AHML, successful implementation of the first stage of the Bank’s development strategy, and substantial improvement in the operational efficiency.

A positive rating action may be prompted by:

  • A successful implementation of the Bank’s development strategy following its transfer under control of JSC AHML, operational integration of these financial institutions, and high systemic importance of RosCap for JSC AHML;
  • A material improvement in operational efficiency, and by the Bank becoming profitable.

A negative rating action may be prompted by:

  • A significant deterioration in asset quality followed by a decline of capital adequacy ratios to a level close to the regulatory minimum.

Rating components

SCA: bb+.

Adjustments: SCA + 3 notches.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Relationships Between Rated Entities and the State.

For the first time, a credit rating of BANK “ROSSIYSKY CAPITAL” (PJSC) was published on June 13, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (December 18, 2017).

The assigned credit rating is based on the data provided by BANK “ROSSIYSKY CAPITAL” (PJSC), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of BANK “ROSSIYSKY CAPITAL” (PJSC) and statements of BANK “ROSSIYSKY CAPITAL” (PJSC) composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and BANK “ROSSIYSKY CAPITAL” (PJSC) participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by BANK “ROSSIYSKY CAPITAL” (PJSC) in its financial statements have been discovered.

ACRA provided additional services to BANK “ROSSIYSKY CAPITAL” (PJSC). No conflicts of interest were discovered in the course of credit rating assignment.

Disclosure of deviations from approved methodologies. Since the Bank undergoes financial rehabilitation, capital adequacy was assessed based on statutory capital adequacy ratio (N1.2), and Tier-1 capital adequacy ratio under IFRS was not assessed. No assessment was made with respect to the loan portfolio dynamics versus its peers as the Bank’s position in the Russian market is unique as well as due to the expected transfer of the Bank under control of JSC AHML.

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Analysts

Irina Nosova
Director, Financial Institutions Ratings Group
+7 (495) 139 04 81
Mikhail Polukhin
Director, Financial Institutions Ratings Group
+7 (495) 139 03 47
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