The upgrade to the credit rating of «Bank Otkritie Financial Corporation» (PJSC) (hereinafter, the Bank) to AA-(RU), outlook Stable, reflects the Bank’s increased systemic importance both within the banking sector and within the national economy overall as a result of its strengthened market position. The Bank’s standalone creditworthiness assessment (SCA) is due to a moderately strong business profile, adequate capital adequacy, weak risk profile, and adequate liquidity and funding position.
The Bank is a systemically important full-service bank, with the Bank of Russia owning over 99.99% of its authorized capital. The Bank’s shares are managed by LLC «Fund of Banking Sector Consolidation Asset Management Company». In August 2017, financial rehabilitation procedures were started for the Bank, which continue today. In addition, the planned full-scale transformation of the Bank and its Group has already been completed, taking into account the merger with B&N Bank, the consolidation of other bank assets (“Rosgosstrakh Bank” PJSC), pension fund, and insurance assets currently held by the Otkritie Group (hereinafter, the Group), as well as the transfer of a significant amount of the Group’s problem assets (more than RUB 500 bln) to a Bank of Non-core Assets (BNA).
Key rating assessment factors
Increased systemic importance is a result of the Group strengthening its market positions (after clearing the balance sheet) by increasing the Bank’s loan and guarantee portfolios, as well as customer funds. The merger with B&N Bank has also contributed a significant increase in the scale of business. In ACRA’s opinion, implementing the planned strategy, taking into account the measures executed for financial rehabilitation, can allow the Group to become an important part for the development of the national economy in the future. In accordance with the Methodology for Analyzing Relationships between Rated Entities and the State, the Bank’s high systemic importance is expressed in the potential consequences of its default, which could lead to a crisis of confidence in the Russian banking sector in general and the state-owned banks in particular, a systemic banking crisis, significant financial and reputational risks for the state, and social risks.
Very high state influence on the creditworthiness. The state, represented by the Bank of Russia, has the ability not only to exercise shareholder control over the Bank’s operations, but also to determine its development strategy and control its activities (representatives of the Bank of Russia and the Ministry of Finance are on the Bank’s supervisory board).
ACRA considers the following to be strong factors of connection between the Bank and the state: the Group has provided unprecedented amounts of financial support to the Bank (around RUB 850 bln in the form of loans from and deposits of the Bank of Russia and over RUB 550 bln in the form of equity); the Bank of Russia remains willing to provide the Bank with extraordinary support in the form of liquidity and capital in a scenario of economic stress and/or in the case of significant deterioration of the Bank’s standalone creditworthiness.
The moderately strong business profile (a-) is determined by the Bank’s strong franchise in corporate lending and transaction services, retail lending (mainly mortgages and unsecured consumer loans), as well as its highly diversified operational income. In the medium-term, the Bank aims to strengthen its market positions with a focus on improving operational efficiency, which is still at a low level; over the past three years, the CTI (cost to income) indicator around 65%. The strategy, given the Russian economy’s weak growth, looks quite aggressive, but the Bank is capable of implementing it.
The adequate capital position is due to a substantial loss absorption buffer in the context of the current balance sheet and off-balance risks both in terms of regulatory standards (N1.2 at 18.3% as of April 1, 2019), and in terms of Basel standards (Tier 1 at 15.2% as of December 31, 2018). This allows the Bank to withstand an increase in credit risk of about 500 bps. Capital generation amounted to 150 bps at the end of 2018. In addition, the averaged capital generation ratio (ACGR) calculated over the last five years has been negative because of significant provisioning in 2017.
The weak risk profile assessment is due to a satisfactory risk management system and low-quality loan portfolio, which accounted for 24% of assets at the end of 2018. Problem loans amount to 27.5% of the portfolio, of which NPL90+ loans amount to 9.7%. Loans that ACRA considers problem or potentially problem equal 17.8%. In addition, the portfolio’s concentration on high-risk industries is acceptable (around 40% of common equity). The Group’s large securities portfolio, which is 45% of assets and formed mainly via non-state pension fund investments, coincides with a high level of market risk (over 200% of common equity). This risk is partially hedged, but it still limits the Bank’s risk profile assessment.
The adequate liquidity position is due to the level of highly liquid assets sufficient to cover potential outflows. Therefore, the short-term liquidity shortage indicator (STLSI) is executed with a surplus in the base case scenario, and with a small deficit in the stress test scenario. ACRA notes no other imbalances in the longer-terms; the long-term liquidity shortage indicator (LTLSI) exceeds 85%. The Bank does not expect any large debt repayments within the next 12 months.
Balanced funding profile. The Bank’s funding base is quite diversified with no high concentration on large sources. The share of funds from the Bank of Russia in the Bank’s liabilities is minimal at 0.3% due to the early repayment of Bank of Russia loans and deposits. Concentration on the largest groups of creditors is negligible, with the largest group of creditors standing at 6.2% of liabilities, and the top 10 at 13.5% at the end of 2018.
Key assumptions
- Timely extraordinary support from the Bank of Russia if necessary;
- Completion of financial recovery procedures within the next six months;
- Maintaining the current business model 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:
- Increase in the Bank’s systemic importance for the economy by giving it the status of authorized bank in any industry and/or the implementation of the planned growth strategy;
- In the case of a change in ownership structure in the medium-term – a significant improvement in the quality of assets and maintaining at a high level/increasing capital adequacy, which together can result in a high SCA and have an impact on the credit rating.
A negative rating action may be prompted by:
- A substantial decline in the systemic importance of the Bank for the national economy;
- A loss by the state of its shareholding or operational control over the Bank.
Rating components
SCA: а-.
Adjustments: state support, on par with RF minus 3 notches.
Regulatory disclosure
The credit rating and credit rating outlook have been assigned under the national scale for the Russian Federation based on the Methodology for Analyzing Relationships between the Rated Entity and the State and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. To assess certain factors of standalone creditworthiness, the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation has been applied.
The credit rating of «Bank Otkritie Financial Corporation» (PJSC) was published by ACRA for the first time on July 3, 2017. The credit rating and credit rating outlook are expected to be revised within one year following the publication date of this press release.
Disclosure of deviations from the approved methodologies. The risk profile factor was evaluated with a deviation from the methodology as the share of the loan portfolio in assets is relatively low and it is not practical to assess the quality of the risk profile mainly on the basis of the quality of the loan portfolio in this case.
The credit rating and the rating status are based on the data provided by «Bank Otkritie Financial Corporation» (PJSC), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using consolidated IFRS financial statements of «Bank Otkritie Financial Corporation» (PJSC) and financial statements of «Bank Otkritie Financial Corporation» (PJSC) composed in compliance with the Bank of Russia Ordinance № 4927-U dated October 8, 2018. The credit rating is solicited, and «Bank Otkritie Financial Corporation» (PJSC) participated in the rating process.
No material discrepancies between the provided data and the data officially disclosed by «Bank Otkritie Financial Corporation» (PJSC) in its financial statements have been discovered.
ACRA provided additional services to «Bank Otkritie Financial Corporation» (PJSC). No conflicts of interest were discovered in the course of credit rating process.
