The upgrade of the credit rating assigned to The joint-stock Bank “ROSEVROBANK” (hereinafter – REB or the Bank) is driven by improvement of its risk profile, on the back of which the Bank’s standalone creditworthiness assessment (SCA) was upgraded to ‘a’. The Bank has a moderately high creditworthiness compared to other Russian credit institutions.
REB is an organically expanding bank operating in the Central, North-West, Ural, South, Volga, and Siberia Federal Districts. Its priority business lines are lending to large companies and medium-sized businesses, issue of guarantees, cash management, salary projects, brokerage services as well as factoring and leasing services offered through its affiliates “R.E. Factoring” and “RosEvroLeasing”. PJSC Sovcombank (A(RU), Stable) is the majority shareholder of REB (75% of shares).
Key rating assessment factors
Increase of risk profile assessment from ‘satisfactory’ to ‘adequate’ is based on improvement in the REB’s loan portfolio quality (46% of assets) by virtue of a decrease in problem and potentially problem loans from 10.6% to 7.8% of the portfolio (including NPL90+ at 1.8%, restructured loans at 2.5%, and problem loans, according to the ACRA methodology, at 3.5%) as well as on the back of a decrease in portfolio concentration on the top ten groups of borrowers from 30% to 25%. However, the share of loans to companies in high-risk industries (18% of core capital) and to affiliates (15% of core capital) remains low as compared to the Bank’s peers. Although the securities portfolio in the Bank’s balance sheet is substantial (accounting for 35% of assets), the market risk is assessed as acceptable in view of the stress-testing results performed by ACRA. At the same time, ACRA notes high credit quality of this group of assets, which limits potential adverse effects on REB’s financing strength caused by market risk. The quality of contingent liabilities (issued guarantees and suretyships accounting for 30% of assets) of the Bank is assessed as fairly high. REB’s risk management system is adequate.
Adequate business profile is determined by the Bank’s stable position in the corporate lending segment. The business profile assessment is further backed by a sufficient level of asset and operating income diversification. In the short term, REB focuses on growing its market presence organically, with an emphasis on preserving its high operating efficiency (CTI was 42% as of December 31, 2017). REB intends to strengthen its positions in lending to large companies and to increase the amount of issued guarantees. The expected reorganization of the Bank as a result of the M&A deal with PJSC Sovcombank would allow achieving a positive synergy effect by virtue of complementary nature of businesses of both credit institutions.
Strong core capital safety buffer is attributed to the Bank maintaining a substantial loss absorption cushion by both regulatory norms (N1.2 standing at 12.2% with the required minimum of 7.875%) and Basel standards (Tier-1 equaled 17.6% as at December 31, 2017), which enables REB to withstand a growth of credit risk by more than 500 bps. Net interest margin (NIM) for the last three years at 6.2% supports REB’s capital generation capacity (over 200 bps on average for the last five years). Moderate dividend payments also contribute to maintaining a comfortable capital adequacy cushion of the Bank.
Adequate liquidity position stems from sufficient amount of liquid and high-liquid assets to cover potential outflows, which results in high short-term liquidity shortage indicator (STLSI) in both base case and stress scenarios of ACRA. The Agency also notes that it did not reveal any disproportion in the longer term (the Bank’s long-term liquidity shortage indicator (LTLSI) stands at around 80%), while no large loan repayments are anticipated within the next 12 months. The Bank’s securities portfolio comprises relatively high-quality assets amid the low level of collateral utilization (15% of securities investments as of December 31, 2017) and may serve as an additional liquidity source.
Well-balanced funding profile. Funds of legal entities (63% of total liabilities) constitute the pillar of the Bank’s funding. REB does not attract any funding from the regulator. ACRA notes that the Bank is not ostensibly reliant on funds from its largest creditor (4.6% of liabilities) and/or group of 10 largest creditors (12% of liabilities).
As to support from the majority shareholder, ACRA makes no additional adjustments as creditworthiness assessment of PJSC Sovcombank equals SCA of REB.
- Adhering to the current business model within the 12 to 18-month horizon;
- No adverse effects from the M&A deal with PJSC Sovcombank;
- The loan portfolio gaining 5%-10% in 2018;
- Cost of credit risk capped at 2%;
- Increase in new bank guarantee issues by 20%-30% driving non-interest income growth;
- Maintaining Tier-1 capital adequacy (N1.2) above 9.5% within the 12 to 18-month horizon.
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:
- A substantial decrease in the non-performing loans;
- Increasing scale of operations accompanied by capital growth and retaining profitability and risk appetite, which strengthens competitiveness of the credit institution.
A negative rating action may be prompted by:
- Lower capital adequacy ratios resulting from rapid growth of assets or cost of risk;
- Deteriorating quality of the loan portfolio and contingent liabilities;
- Growing market risk accepted by the Bank.
Support: no systemic importance.
No debt securities in free float.
The credit rating of The joint-stock Bank “ROSEVROBANK” 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, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of The joint-stock Bank “ROSEVROBANK” was published by ACRA on April 28, 2017 for the first time. The credit rating of The joint-stock Bank “ROSEVROBANK” and its outlook are expected to be revised within one year following the rating action date (April 25, 2018).
Disclosure of deviations from the approved methodologies. To account for market risk in the rating model, ACRA has conducted a stress testing, the results of which, according to the Agency, more correctly reflect the scope of potential securities portfolio losses.
The assigned credit rating is based on the data provided by The joint-stock Bank “ROSEVROBANK”, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of The joint-stock Bank “ROSEVROBANK” and statements of The joint-stock Bank “ROSEVROBANK” composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and The joint-stock Bank “ROSEVROBANK” participated in its assignment.
No material discrepancies between the provided information and the data officially disclosed by The joint-stock Bank “ROSEVROBANK” in its financial statements have been discovered.
ACRA provided additional services to The joint-stock Bank “ROSEVROBANK”. No conflicts of interest were discovered in the course of credit rating assignment.