The credit rating of Russian National Commercial Bank (hereinafter, RNCB, or the Bank) has been upgraded to reflect an upgrade of the Bank's funding and liquidity assessment to adequate following a decline in the concentration of its resource base. The credit rating is also based on the sustainable but concentrated business profile, strong capital adequacy, and satisfactory risk profile, which will allow the Bank to withstand additional pressure on its financial indicators caused by deteriorating economic environment. The rating is supported by the Bank’s medium systemic importance for the Russian economy and a very strong state influence on its creditworthiness, according to the ACRA methodology.
The credit rating of bond RU000A101FK0, which is a senior unsecured debt instrument, has been upgraded to A+(RU) in view of the upgrade of the Bank's credit rating.
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. Having acquired PJSC KRI BANK (hereinafter, KRI BANK), which has undergone the financial rehabilitation procedure, RNCB now ranks 36th by assets among Russian banks.
Key rating assessment factors
High likelihood 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.
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 expand actively, but makes it dependent on the sanctions regime. Penetration to other regions, including Krasnodar Krai, is restricted by a high competition. The Bank has maintained a high level of business diversification thanks to a high volume of non-interest earnings.
RNCB maintains a significant loss absorption buffer under regulatory standards (N1.2 = 19.16% as of February 1, 2020, N20.2 = 13.35% as of January 1, 2020). The substantial loss absorption buffer and the 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).
RNCB has demonstrated an increase in its ability to generate capital, as the averaged capital generation ratio was 98 bps in 2016–2018 and the capital generation amounted to 165 bps in 2019. The Bank makes dividend payout in line with legislative requirements for state-owned companies.
ACRA expects that the Bank's relatively high operational efficiency will support its capital generating capacity. In 2017–2019, CTI amounted to 50% and NIM reached 6.5%.
The Agency keeps the satisfactory risk profile assessment. The share of problem assets in the Bank's loan portfolio does not exceed 5%. However, according to ACRA's estimates and taking into account the assets of KRI BANK, the share of problem and potentially problem assets is about 15% (excluding loans covered by state guarantees). ACRA notes that such assets, which include Stage 3 loans under IFRS 9 and past due notes, are covered with reserves by more than 100%.
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. As of January 1, 2020, the share of loans issued to the top ten groups of borrowers, except loans covered by state guarantees, is over 30% of the total portfolio.
The liquidity and funding assessment has been upgraded from satisfactory to adequate because of a decrease in the reliance on the funds of the largest lenders/depositors. The share of funds of the largest depositor (the Deposit Insurance Agency) amounts to less than 10% of all obligations of the RNKB, and the share of the top 10 lenders/depositors is 25.6%. The Agency believes that the concentration may decline further with an increase in the volume of operations.
ACRA notes that the Bank maintains a strong liquidity position. As of December 31, 2019, the STLSI was RUB 30.5 bln in the base case scenario and -2.7% in the stress scenario of ACRA, and the LTLSI was 60%.
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 ratios (N1.2 and N20.2) not lower than 12% 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:
- An increase in the quality of the loan portfolio with the maintenance of a share of problem borrowers;
- 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.
Rating components
Standalone creditworthiness assessment (SCA): bbb+.
Adjustments: state influence, 3 notches up to the SCA.
Issue ratings
Exchange-traded interest-bearing certified unregistered bond, 01 series (RU000A101FK0), maturity: February 16, 2023, issue volume: RUB 3 bln — А+(RU).
Rationale. The above issue represents senior unsecured debt of RNCB. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of RNCB, i. e. A(RU).
Regulatory disclosure
The credit ratings were assigned to RNCB and the bond (ISIN RU000A101FK0) issued by RNCB 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also applied in the process of the credit rating assignment.
The credit ratings of RNCB and the bond (ISIN RU000A101FK0) issued by RNCB were first published by ACRA on April 11, 2017 and February 20, 2020 respectively. The credit rating of RNCB and its outlook and the credit rating of the above bond are expected to be revised within one year following the publication date of this press release.
The credit ratings are 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 ratings are solicited, and RNCB participated in their 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.
