ACRA has affirmed the credit rating of RosDorBank (hereinafter, the Bank) at BB-(RU) based on the Bank’s limited business profile assessment, satisfactory capital adequacy, weak risk profile, and adequate liquidity and funding position. ACRA has also affirmed the credit rating of the subordinated bond issued by the Bank (RU000A0ZZZ25) at B-(RU).
The change in outlook from Developing to Stable reflects an increased degree of certainty regarding ACRA’s assessment of the Bank’s capital adequacy. The increase in authorized capital occurred later than planned and in a smaller amount (RUB 749 mln in December 2019 instead of RUB 1 bln in August 2019). However, the positive effect of the increase in capitalization is not enough to justify a higher rating due to the low operational efficiency demonstrated by the Bank over the past three years.
New investors also took part in the capital increase, namely the Czech company J&T Group (3.4%) and its business partner P. Korbachka (6.5%). Their goal for the future is to invest in real estate in Russia in partnership with the Bank, which has experience in the Russian market and the necessary expertise in the construction and real estate sectors. In ACRA’s opinion, cooperation with foreign investors will have a positive impact on the Bank’s business, giving it access to servicing new clients and profitable projects.
The volatility observed in the financial markets in recent days has not had a direct negative effect on the Bank because the currency component of the balance sheet and its open position are insignificant. However, a prolonged economic downturn may negatively affect the Bank’s operations, given that the construction sector (including road construction) accounts for about a third of its loan portfolio.
RosDorBank is a small bank based in Moscow that specializes in servicing corporate clients in the SME segment. As of the beginning of February 2020, the Bank ranked 158th in terms of equity capital among Russian credit institutions. The Bank’s main shareholders are the Artiukhov family (40%) and V. Dorgan (14%), with the remaining shares distributed among partners (26%), top managers of the Bank (11%), and the new European investors.
Key rating assessment factors
The limited business profile assessment reflects the Bank’s weak franchise in the Russian banking market, coupled with poorly diversified operating income.
The Bank’s strategy focuses on SMEs in the construction industry, where the Bank boasts extensive experience and deep understanding of various construction industry segments (including road construction), the transportation sector, and related machinery industry segments. ACRA expects that the Bank will be focused particularly on the transportation segment in the next 12 months, providing financing in the form of leasing. Implementing national projects in the road and infrastructure construction segment, assuming it is not suspended due to instability in financial markets, can also stimulate the Bank’s growth.
ACRA notes that the Bank’s development model involves the active use of the business relationships and connections of its many owners, which greatly contribute to attracting and retaining clients.
The Bank’s satisfactory capital adequacy reflects a relatively comfortable N1.2 ratio, which stood at 11% as of the beginning of February 2020, and the Bank’s limited internal capacity to generate capital (for the past five years, the averaged capital generation ratio amounted to 38 bps). The latter is due to the Bank’s regular dividend payments to shareholders.
The capital injection in December 2019 strengthened the Bank’s ability to absorb losses for the following 12 months. ACRA’s stress test showed that the Bank is able to withstand an increase in the cost of risk of over 500 bps relative to the base case scenario without violating the N1.2 ratio. However, despite the high results of stress test, ACRA has not improved the capital adequacy assessment due to the insufficient operational efficiency demonstrated by the Bank over the past three years - average cost-to-income (CTI) was 77%.
The Bank’s risk profile is weak due to the relatively high share (16%) of potentially problem loans in the loan portfolio and the moderately high concentration of the loan portfolio. The share of the top 10 borrowers accounts for about one-third of the Bank’s loan portfolio.
ACRA assesses the credit quality of assets outside the loan portfolio (reverse repurchase transactions, portfolio of securities, and portfolio of guarantees) as adequate.
ACRA considers the Bank’s market risk to be manageable. However, a possible negative revaluation of the securities portfolio (approximately 15% of balance sheet with an average time to maturity of 7.5 years) may affect capitalization in the event of a sharp increase in interest rates in the economy.
Adequate funding and liquidity position. The Bank has sufficient liquidity reserves (liquid assets account for approximately half of its assets) and can withstand a significant outflow of client funds in both ACRA’s base case and stress scenarios (liquidity surplus in the stress scenario was 17% of liabilities as of the beginning of 2020). In addition, the long-term liquidity shortage ratio does not indicate any critical risks associated with the management of the Bank’s assets and liabilities (the indicator was equal to 80% as of the same date).
Key assumptions
- Maintaining the current business model within the 12 to 18-month horizon;
- Maintaining the capital adequacy ratio (N1.2) above 9% within the 12 to 18-month horizon;
- Maintaining the high quality of receivables outside the loan portfolio.
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:
- Improvement in loan portfolio quality;
- Sustainable decrease in CTI below 75%.
A negative rating action may be prompted by:
- Lower capacity to absorb credit losses;
- Deterioration in asset quality.
Rating components
SCA: bb-.
Adjustments: none.
Support: none.
Issue ratings
RosDorBank, 02 series (RU000A0ZZZ25), maturity: December 12, 2024, issue volume: RUB 300 mln — В-(RU).
Rationale. The 02 series bond issue (RU000A0ZZZ25) has been affirmed at B-(RU) based on the affirmation of the issuer’s credit rating. The issue is a Tier 2 capital source, which implies a significant level of subordination with respect to senior unsecured creditors and determines its rating three notches below the credit rating of the Bank.
Regulatory disclosure
The credit ratings were assigned to RosDorBank and the bond (ISIN RU000A0ZZZ25) issued by RosDorBank 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 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 used in the process of credit rating assignment.
The credit ratings of RosDorBank and its bond (RU000A0ZZZ25) were published by ACRA for the first time on April 10, 2018, and December 21, 2018, respectively. The credit rating of RosDorBank and its outlook as well as the credit rating of its bond are expected to be revised within one year following the publication date of this press release.
The assigned credit ratings are based on the data provided by RosDorBank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of RosDorBank and the financial statements of RosDorBank drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit ratings are solicited, and RosDorBank participated in their assignment.
No material discrepancies between the provided data and the data officially disclosed by RosDorBank in its financial statements have been discovered.
ACRA provided no additional services to RosDorBank. No conflicts of interest were discovered in the course of credit rating assignment.
