The credit rating of Promsvyazbank PJSC (hereinafter, the Bank) has been upgraded to AA(RU) on the significance of the Bank's services for the Russian defense industry, which has grown up within the last 12 months. Moreover, ACRA expects that the Bank's positions in this segment will strengthen even more. The standalone creditworthiness assessment (SCA) of the Bank reflects its moderately strong business profile, adequate capital adequacy, low risk profile assessment, and adequate funding and liquidity position.
In ACRA's opinion, in the event of a systemic economic stress scenario and/or a significant deterioration in the Bank's standalone creditworthiness, the state will provide it with sufficient extraordinary support in the form of capital and/or liquidity to meet creditors' claims. Therefore, in its rating analysis, ACRA applied the Methodology for Analyzing Relationships Between Rated Entities and the State.
Key rating assessment factors
The systemic importance assessment has been increased on the role the Bank plays in servicing Russian defense enterprises, which has become dominating. It is evidenced by the substantial share of defense industry funding that goes through the Bank due to the consolidation of defense orders and other large government contracts. Currently, defense loans and capital are transferred actively to the Bank from other banks, and by 2023, the Bank's portfolio is expected to consolidate about 70% of state defense contracts.
The Bank holds important positions in the banking system of the Russian Federation and its default may cause a crisis of confidence to the entire Russian banking sector and the Russian state-owned banks in particular; it may also trigger a systemic banking crisis and give rise to significant financial, reputational, and social risks for the state. The acquisition by the Bank of Sviaz-Bank (ACRA rating BBB+(RU), outlook Stable) expected to be completed in 2020 will also contribute to the expansion of the Bank’s business, but will not have a significant impact on its creditworthiness.
Another important contributor to the Bank’s high systemic importance is the significant amount of state support in the form of capital and liquidity granted to the Bank in 2017–2019.
Very strong influence of the state on the Bank's creditworthiness. The Bank is fully owned by the Russian Federation. The propensity of the state to provide the Bank with extraordinary support in the form of capital and/or liquidity, as well as the historical facts of state support in order to ensure an adequate level of capital and liquidity and to compensate the outflow of client funds are also indicate the very strong ties between the Bank and the state.
The main factor limiting the rating of the Bank at the level of "on par with the RF minus 2 notches" is the dominant but not key positions of the Bank in the sector of banking services for Russian defense industry.
The moderately strong business profile (a-) is determined primarily by the market positions of the Bank and the universal nature of its operations. The Bank’s strategy looks quite aggressive, which is dictated by the Bank's status as a pillar defense industry bank and its desire to retain its position in the traditional banking segments. At the same time, the operational efficiency of the Bank is still low: in 2018, the CTI (cost to income) amounted to 76% and the NIM (net interest margin) was about 3%, although certain signs of upward trend have been demonstrated in 2019.
The adequate capital position is based on the acceptable capital adequacy ratios under both prudential standards (N1.2 at 10.4% as of October 1, 2019) and Basel standards, which allows the Bank to withstand the credit risk growth of more than 500 bps. At the same time, the five-year average capital generation ratio is negative, which is due to the allocation of significant reserves in 2017 and 2018.
The critical risk profile assessment is the result of the poor quality of the loan portfolio (48.5% of assets, the 77% increase in the portfolio less reserves over the past 12 months), with the share of problem loans of 23.5% (of which 21.9% are NPL90+ and 1.5% are loans that ACRA considers problem or potentially problem loans based on an analysis of the 30 largest groups of borrowers), while the share of the 10 largest groups of borrowers is heightened. The portfolio concentration on high-risk industries is moderate (no more than 80% of Tier 1 capital), and the level of market and operational risk is acceptable.
The adequate liquidity position is due to the sufficient volume of high-liquid assets to cover the potential outflow of funds, and therefore, the short-term liquidity shortage indicator is satisfactory in both the base case and stress scenarios. There are no liquidity imbalances for longer periods (the long-term liquidity shortage indicator exceeds 85%), while large repayments are not expected in the next 12 months.
The well-balanced funding profile. The resource base of the Bank is low diversified and focused on the largest lender, as the amount of funds allocated by the state is significant.
Key assumptions
- State non-financial support to the Bank;
- Provision of sufficient capital and liquidity from the state, in case of need;
- Acquisition of Sviaz-Bank by 2020;
- The Bank's business model to remain unchanged within the next 12–18 months.
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:
- Higher systemic importance of the Bank for the Russian economy.
A negative rating action may be prompted by:
- Loss of shareholder or operational control over the Bank by the state;
- Significant decrease in the level of systemic importance of the Bank.
Rating components
SCA: bbb+.
Adjustments: state support, on par with the RF minus 2 notches.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating is assigned under the national scale for the Russian Federation and is based on the Methodology for Analyzing Relationships Between Rated Entities and the State and Key concepts used by the Analytical Credit Rating Agency within the scope of its rating activities. Some factors of standalone creditworthiness were determined using the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation.
The credit rating of Promsvyazbank PJSC was first published by ACRA on October 20, 2018. The credit rating and its outlook are expected to be reviewed within one year following the publication date of this press release.
The credit rating is based on the data provided by Promsvyazbank PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of Promsvyazbank PJSC and statements of Promsvyazbank PJSC composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Promsvyazbank PJSC participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Promsvyazbank PJSC in its financial statements have been discovered.
ACRA provided additional services to Promsvyazbank PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
