The credit rating assigned to JSC "Denizbank Moscow" (the Bank) is based on a high standalone creditworthiness assessment (SCA) that stems from a strong capital adequacy, satisfactory risk profile and a well-balanced liquidity and funding position. The likelihood of extraordinary support from Denizbank Financial Services Group (the Group) is assessed neutrally.
The Developing outlook reflects ACRA's opinion about possible credit rating upgrade / downgrade that may be caused by a potential change in the creditworthiness of Denizbank A.S., the supporting organization of the Bank (the Supporting Organization), in view of the following:
- The Supporting Organization's shareholding structure is expected to change: in May 2018, Sberbank, owning 99.85% in the Group, concluded a binding sales agreement with Emirates NBD Bank PJSC in respect of Denizbank A.S. The deal is expected to be closed by late 2018;
- Possible deterioration in the economic situation in Turkey caused by, among other things, the falling exchange rate of Turkish lira and the worsening balance of payments of Turkey.
The Bank is a Russian subsidiary of a foreign bank, with its sole office in Moscow, wholly owned by Denizbank A.S. based in Turkey (including 51% through Denizbank AG based in Austria). The Bank ranks 119th by equity among Russian credit institutions. The Bank's core line of business includes comprehensive services (including lending and project financing, guarantees and letters of credit, cash and settlement services) to companies involved in export-import operations between Russia and Turkey and customers of the Group that are Turkish entities operating in Russia.
Key rating assessment factors
The likelihood of shareholder's extraordinary support is assessed neutral because the Bank's SCA is almost equal to the Supporting Organization's creditworthiness assessment.
On the other hand, the Bank's ties with the Supporting Organization are assessed as very strong, as:
- The Bank implements the Russian corporate business strategy of the Supporting Organization;
- The operating integration between the Bank and the Supporting Organization is significant, in terms of corporate governance and risk management;
- Reputational risks may be high in case the Bank goes bankrupt.
The resulting assessment of country risk of jurisdictions of presence (mainly Turkey and Austria) of the foreign Supporting Organization generally corresponds to that of Russia.
In view of the above, ACRA does not upgrades the Bank's SCA.
Adequate business profile stems primarily from the Bank's strong franchise in servicing the Group's customer companies in Russia. The operating income diversification is low (the Herfindahl-Hirschman index is 0.31) due to the nature of the Bank's business. The system of corporate governance and strategic planning is assessed as adequate, given the significant control exercised by the Supporting Organization over the Bank's operations and many years of successful work experience of top managers in both the Bank and the Group.
Significant loss absorption buffer is driven by a high level of common capital under both Basel standards (Tier-1 CAR = 40.4% as of March 31, 2018) and regulatory standards (N1.2 = 22.2% as of August 1, 2018) that allows the Bank to withstand the growth in the cost of credit risk by more than 500 bps. The high average capital generation ratio (ACGR at 363 bps over the past five years) is a result of a stable profitability of business and no dividend payments. The operational efficiency is assessed as high, based on the three-year average CTI (about 24%) and NIM (5.5%).
Satisfactory risk profile assessment is underpinned by an acceptable share of potentially problem, in ACRA's opinion, loans in the Bank's loan portfolio: 10.3%, with no NPL90+ and restructured loans, and a low proportion of loans granted to companies operating in the high-risk industries: no more than 10% of common capital. At the same time, the concentration on the top 10 groups of customers is extremely high: 96% of the portfolio, which is somewhat offset by guarantees issued by the Supporting Organization for a number of loans. The Bank adheres to a conservative policy in its operations in the interbank market (21% of assets) and in the formation of liquidity portfolio consisting of highly liquid securities (14% of assets). The quality of the off-balance sheet contingent liabilities is assessed as adequate, as guarantees issued to construction companies comprise 30% of the Bank's common capital.
Adequate liquidity and funding position is due to the high ability of the Bank to perform its obligations on the 90-days horizon, given the significant surplus of short-term liquidity in both the base case scenario (about RUB 6 billion) and in the stressful scenario (30% of liabilities), as well as the possibility of instant attraction of funds through repurchase transactions (the securities portfolio is not encumbered). No imbalances are observed for longer periods (the long-term liquidity shortage indicator, LTLSI, is 117%), and we expect no large outflows of funds in the next 12 months.
The Bank attracts funding from its Supporting Organization (70% of liabilities) and through corporate deposits (another 25%); no funds are attracted from the Bank of Russia.
- The Bank will follow its current business model in the next 12–18 months;
- There will be no significant changes in the shareholding structure of the Bank (Denizbank A.S. and Denizbank AG) in the next 12–18 months;
- Common capital adequacy ratios (N1.2/Tier-1) will be above 15% in the next 12–18 months.
Potential outlook or rating change factors
The Developing outlook assumes with equal probability either an upgrade or a downgrade of the rating within the 12–18-months horizon.
A positive rating action may be prompted by:
- An active support to the Supporting Organization and/or the Bank from their new shareholder, Emirates NBD Bank PJSC;
- Lower concentration of the loan portfolio on top customers amid a substantial decline in the share of potentially problem loans in the loan portfolio or guarantees issued by the Supporting Organization for such loans.
A negative rating action may be prompted by:
- Lower creditworthiness of the Supporting Organization caused by, among other things, deteriorating Turkish economy;
- Higher share of problem loans in the Bank's loan portfolio;
- Substantially higher market risk accepted by the Bank;
- The Bank's need for financial resources from the Supporting Organization.
There are no outstanding issues.
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, the Methodology for Analyzing Relationships between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating has been assigned to JSC "Denizbank Moscow" for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (September 4, 2018).
Disclosure of deviations from the approved methodologies. Within the funding and liquidity factor, the funding sources diversification assessment is upgraded one notch up because the significant dependence on the Supporting Organization has been taken into account in the concentration of funding sources on the largest group and top 10 groups of customers.
The credit rating was assigned based on the data provided by JSC "Denizbank Moscow", information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of JSC "Denizbank Moscow" and the financial statements of JSC "Denizbank Moscow" drawn up in compliance with Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and JSC "Denizbank Moscow" participated in its assignment.
No material discrepancies between the provided information and the data officially disclosed by JSC "Denizbank Moscow" in its financial statements have been discovered.
ACRA provided no additional services to JSC "Denizbank Moscow". No conflicts of interest were discovered in the course of credit rating assignment.