The credit rating of JSC "Bank DOM.RF" (hereinafter, the Bank) has been upgraded from BBB(RU) to A(RU) due to the improvement in the Bank’s standalone creditworthiness assessment (SCA) from b+ to bbb-, which reflects a significant growth of the Bank’s capitalization that had a positive impact on the business profile, capital adequacy, and risk profile assessments.
Additionally, ACRA notes a high likelihood of support (in the form of capital and liquidity) from the Bank’s sole shareholder, JSC "DOM.RF" (ACRA rating — AAA(RU), outlook Stable; hereinafter, the Supporting Organization), which is reflected in four additional notches up to the SCA. On the whole, according to ACRA, the process of the Bank’s operational transformation could be considered finished given the completion of its financial rehabilitation procedure ahead of schedule, which is why the Agency no longer applies a positive adjustment to the SCA.
Key rating assessment factors
High likelihood of extraordinary support from the Supporting Organization underpins substantially the final assessment of the Bank’s creditworthiness. The Agency notes that the Supporting Organization holds 100% shareholder and operational control over the Bank, which bankruptcy may entail significant reputational and financial risks for the Supporting Organization. Furthermore, the Bank plays a significant role in the implementation of the Supporting Organization’s strategy.
The business profile assessment has been upgraded to bbb due to the improvement in the assessment of the Bank’s franchise, thanks, among other things, to the improvement in its position in terms of equity (as of November 1, 2019, the Bank was in the top 20 credit institutions in Russia). The Bank’s development strategy envisages a proactive growth in financing of construction projects, as well as an increase in mortgage lending. In the first nine months of 2019, the Herfindahl — Hirschman Index, which indicates a relatively high diversification of the Bank’s operating income, stood at 0.24x. At the same time, ACRA points to a substantial impact of income from non-banking activities on the financial result. The assessment of the Bank’s corporate governance quality is satisfactory. The 100% shareholder control exercised by the Supporting Organization allows the Agency to assess the transparency of the Bank’s ownership structure as high.
The capital adequacy assessment has been upgraded to adequate mainly due to the Bank’s additional capitalization in 2019. The Bank’s common capital rose by more than RUB 50 bln in January–October, 2019, which resulted in the N1.2 ratio exceeding 30%. According to ACRA, the existing loss absorption buffer allows the Bank to withstand a credit risk increase far exceeding 500 bps. At the same time, the Agency expects that the regulatory adequacy ratios will decrease due to the implementation of the existing development plans. Given significant changes in the business model and the structure of operating income, the Agency maintains its neutral assessment of the Bank’s ability to generate capital. Additionally, the efficiency of the Bank’s operations is still relatively low.
The Bank’s risk profile assessment has been upgraded from critical to weak due to the impact of the increase in the Bank’s common capital on some of the risk profile’s parameters: the growth of common capital led to a decline in relative volumes of lending to high-risk industries and non-core assets. The risk profile assessment is constrained by aggressive growth rates of the loan portfolio (nearly 50% for the nine months of 2019). ACRA expects a rapid portfolio growth to continue within the 12 to 18- month horizon, which will be driven primarily by the increase in loans due from construction companies. At the same time, there is still a large volume of NPL90+ (23.7%) in the Bank’s loan portfolio, while the share of the ten largest groups of borrowers is 24.9% of the loan portfolio. As of September 30, 2019, reserves cover the Bank’s problem debt by more than 90%.
The liquidity and funding position has been downgraded from adequate to satisfactory due to growing dependence of the resource base on funds of the largest creditors. As of September 30, 2019, the share of funds of the ten largest groups of creditors (depositors) is 32.5% of the liabilities. Funds of legal entities (48% of liabilities as of September 30, 2019) remain the major source of funding. Assessing the Bank’s liquidity position, the Agency points to the significant imbalance of assets and liabilities by maturity. ACRA notes that the Bank’s ability to fulfill its obligations within the 12-month horizon depends on the largest creditors’ willingness to extend the period of holding their funds with the Bank. Considering that a significant amount of the Bank’s resource base is formed by the shareholder’s funds, ACRA assesses the liquidity shortage risk as moderate.
Key assumptions
- The Supporting Organization will retain its shareholder and operational control over the Bank;
- The current strategy of the Bank will be implemented with the focus on construction and mortgage loans.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely remain unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Significant improvement in operational efficiency, higher capital generation capacity;
- Material improvement in the loan portfolio quality;
- Significant improvement in the liquidity position;
- Lower dependence of the Bank on the funds of the largest creditors.
A negative rating action may be prompted by:
- Significant decrease in regulatory capital adequacy ratios.
Rating components
SCA: bbb-.
Adjustments: none.
Support: 4 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 based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities, and the Methodology for Analyzing Member Company Relationships Within Corporate Groups.
The credit rating of JSC "Bank DOM.RF" was published by ACRA for the first time on June 13, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The assigned credit rating is based on the data provided by JSC "Bank DOM.RF," information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC "Bank DOM.RF" and statements of JSC "Bank DOM.RF" composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and JSC "Bank DOM.RF" participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by JSC "Bank DOM.RF" in its financial statements have been discovered.
ACRA provided additional services to JSC "Bank DOM.RF." No conflicts of interest were discovered in the course of credit rating assignment.
