The credit rating of Russian National Commercial Bank (hereinafter, RNCB, or the Bank) is based on its higher risk profile assessment coupled with a downgrade in the Bank’s funding and liquidity assessment to satisfactory. The credit rating is also based on a stable but concentrated business profile of RNCB and its strong capital adequacy. Additionally, such factors as the Bank’s moderate systemic importance for the Russian economy and a very strong state influence on its creditworthiness also affect the rating, according to the ACRA methodology.
The change in outlook to Positive reflects ACRA’s expectations of a possible increase in the funding and liquidity assessment due to lower dependence of the resource base on funds of the largest creditors as the Bank will continue to further develop its operations.
RNCB is the largest credit institution in the Crimea Region dominating the Republic of Crimea and the city of Sevastopol by most performance indicators. The Bank is owned by the Russian Federation (100% control), while its nominal shareholder is the Federal Agency for State Property Management. RNCB owns PJSC KRI BANK (hereinafter, KRI BANK) operating in the Krasnodar Krai and put under the financial rehabilitation procedure. RNCB ranked 42nd by assets in Russia as of February 1, 2019 (39th based on the consolidated data of the bank group comprising RNCB and KRI BANK (hereinafter, the Group) as of January 1, 2019).
Key rating assessment factors
High probability of extraordinary support from the government. RNCB is a dominating player on the Crimea peninsula, a market, which is strategically important for the Russian Federation. RNCB’s bankruptcy may lead to a significant deterioration of the economic environment in the Republic and pose certain risks to its population, since the Bank is responsible, among other things, for servicing a significant amount of social payments. At the same time, RNCB’s default does not incur substantial risks for federal or regional budgets because its share in budget revenues is small. In ACRA’s opinion, the above factors indicate a medium systemic importance of RNCB.
The state exercises shareholder control (the Bank is wholly-owned by the state) and operational control (by defining strategy and providing capital) over RNCB’s activities. Providing loans for financing pivotal infrastructure projects in Crimea and Sevastopol, RNCB is thus involved in activities of regional importance. The Agency is of the opinion that the state has a very strong influence on the Bank’s performance.
Business profile assessment includes risks of regional specifics of the Bank’s business. Crimea remains the key operational region of RNCB, where there are not so many leaders of the Russian bank industry. This allows the Bank to actively increase the volume of its operations, but makes it dependent on the sanctions regime. In contrast, KRI BANK is under pressure of tight competition in both active and passive transactions, which limits the possibilities of its strengthening in the Krasnodar Krai (ACRA rating: A(RU), outlook Stable). The high share of non-interest earnings in the 2018 operating income supported high diversification of the Bank’s business
RNCB maintains a significant loss absorption buffer under regulatory requirements (N1.2 = 36.378% as of March 1, 2019, N20.1 = 13.92% as of January 1, 2019). The substantial loss absorption buffer and high quality of assets enable the Bank to withstand a 500+ bps credit risk increase without a breach of the Tier 1 capital adequacy ratio (N1.2). The Agency notes that the risks of formation of additional reserves for certain problem assets of KRI BANK have been taken into account in the Group capital adequacy calculations through recognition of negative goodwill. In addition, ACRA is of the opinion that there is a high likelihood that RNCB will be recapitalized if further reserves are needed to support the assets of KRI BANK. Therefore, the Group is also able to withstand a significant increase of credit risk.
RNCB’s ability to generate capital at the level of the Group remains moderate. The Bank showed a positive performance (according to the IFRS statements for 9M2018), but the 2016–Q3 2018 averaged capital generation ratio of the Group amounted to 65 bps. The Bank makes dividend payout in line with legislative requirements for state-owned companies.
Risk profile assessment of the Bank has been upgraded from weak to satisfactory due to the improvement in the quality of its loan portfolio.
According to ACRA estimates, the share of NPLs and potentially NPLs is less than 5% of the Bank’s portfolio (except loans covered by state guarantees), which indicates a high quality of loans issued. As of December 31, 2018, the share of NPL90+ in the Bank’s portfolio was less than 1%. At the Group level, the share reached 12% (as of September 30, 2018) because of loans issued by KRI BANK. The Agency points to a high level of coverage of NPL90+ of KRI BANK and excludes such loans when assessing the quality of the loan portfolio.
ACRA notes that despite an active growth of the loan portfolio, including through increased loans to retail customers and small and medium-sized enterprises (SMEs), concentration of the Bank’s loan portfolio remains high. The share of loans issued to the top ten groups of borrowers, except loans covered by state guarantees, is over 50% of the total portfolio.
In nine months of 2018, the Group’s loan portfolio grew by 36.7% (under IFRS). In 2019, the Bank plans to maintain a high-speed asset growth, largely due to the increase in the portfolio of loans provided to SMEs and individuals. ACRA believes that the portfolio in the main region of the Group’s presence has been growing without a significant increase in the volume of problem loans until now, noting, however, that the maintenance of a high growth rate of the portfolio may lead to the deterioration in its quality in the future.
Liquidity and funding assessment has been downgraded from adequate to satisfactory because of changes in asset structure due to the growth of the loan portfolio and, as a result, a decrease in the share of liquid assets on the balance sheet of the Bank.
At the same time, ACRA points to a decrease in RNCB’s dependence on individuals’ funds (under IFRS, 54.7% for nine months of 2018 vs. 62.4% a year earlier). However, there is a pronounced concentration on the funds of the Deposit Insurance Agency (DIA) in the structure of KRI BANK’s liabilities, which limits the final assessment of the Bank’s funding.
Key assumptions
- Retaining the Russian government’s shareholder control over the Bank;
- Adhering to the current business model within the 12 to 18-month horizon;
- Maintaining high diversification of operating income;
- Tier-1 capital adequacy (N1.2 and N20.2) not lower than 12% within the 12 to 18-month horizon.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely be changed within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- A successful implementation of the current strategy;
- An increase in the business scale of the Bank;
- An increase in the quality of the loan portfolio with the maintenance of a share of problem borrowers;
- A decline in the Bank’s dependence on funds from the largest creditor (depositor) as the Bank will further develop its activities;
- Improvement in the liquidity position.
A negative rating action may be prompted by:
- A deterioration of the competitive environment in the key region of presence;
- A decline in asset credit quality;
- A decrease in capital adequacy ratios at the Group level.
Rating components
Standalone creditworthiness assessment (SCA): bbb.
Adjustments: state influence, 3 notches up to the SCA.
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 Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of RNCB was first published by ACRA on April 11, 2017. 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 is based on RNCB’s data, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of RNCB and statements of RNCB composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and RNCB participated in its assignment.
No material discrepancies between the provided data and data officially disclosed by RNCB in its financial statements have been discovered.
ACRA provided additional services to RNCB. No conflicts of interest were discovered in the course of credit rating assignment.
