ACRA has affirmed the credit rating of JSC Russian Agricultural Bank (hereinafter Russian Agricultural Bank, or the Bank) and its bond issues as the main components of the assessment are maintained, in particular the high systemic importance of the Bank for the Russian economy and the very strong degree of state influence on the Bank. However, the Bank is characterized by a moderately low standalone creditworthiness assessment (SCA). The Bank’s SCA reflects low capital adequacy and risk profile assessments, as well as a sufficiently high business profile assessment and adequate liquidity and funding.
Russian Agricultural Bank is one of Russia’s largest credit institutions, ranked fifth in assets and capital, and is the third largest state-owned bank in terms of assets.The Bank focuses on corporate lending, especially to the agricultural sector – the business line subsidized by the state and prioritized for the Bank.
Key rating assessment factors
High probability of the government providing the Bank with extraordinary support. The Bank’s high systemic importance (according to ACRA’s Methodology for Analyzing Relationships Between Rated Entities and the State) is related to the potential consequences of its default, which could lead to a systemic banking crisis and cause significant problems in sel ect agricultural subsectors, as well as pose significant risks for the federal budget and social stability. The very strong degree of state influence is reflected in the Russian government executing operational control over the Bank, in the latter’s close involvement with state-run agricultural programs, and in multiple instances of the Bank obtaining state support since its inception, mainly through capital replenishment. The degree of relationship with the state is reflected in the credit rating of the Bank.
Fairly strong business profile. The “a-“ business profile reflects the Bank’s strong franchise and in particular its leading positions in lending to the agricultural sector as well as in the Russian banking system overall. The Bank’s strong franchise is characterized by a developed regional network and is based on the loyalty of the customer base, especially in regions of Russia with a developed agricultural specialization. The Bank’s operating network is one of the most developed in Russia and includes 66 regional branches, 985 additional offices, and 270 operating offices. The Bank’s business is characterized by an average level of operating income diversification.
The Bank’s strategy includes the further development of services to the agricultural and related industries, while improving the efficiency of operations and improving the quality of assets.
The Bank’s capital adequacy assessment remains low. The Bank maintains a satisfactory absorption buffer against unexpected losses in accordance with regulatory standards. N1.2 stood at 11.75% as of February 1, 2020, while N20.2 stood at 10.14% as of January 1, 2020. In assessing the Bank’s capital adequacy, ACRA took into account the Bank’s relatively low capitalization according to IFRS. The Bank receives regular state support in the form of capital and places it in perpetual bonds. However, the Bank’s ability to generate capital remains extremely low. The Bank’s averaged capital generation ratio for 2015-2019 is negative, despite positive financial results in 2018-2019. Low profitability limits the Bank’s ability to withstand an increase in credit risk if the loan portfolio deteriorates or if the Bank creates reserves for problem loans.
ACRA notes a reduction in the amount of problem loans on the Bank’s balance sheet in 2019. NPL90+ loans amounted to 11.7% in 2019 compared to 14.9% a year earlier. The volume of loans ACRA considers problem and potentially problem (loans classified by the Bank according to internal ratings as defaulted – stage 3, according to IFRS 9 – as well as high-risk loans – stage 2), had decreased to 18.5% by the end of 2019 compared to 23% in 2018. In the medium term, further improvement in the quality of the portfolio may lead to an increase in the Bank’s SCA, but the current level of problem and potentially problem loans is high in ACRA’s opinion and exceeds the indicators of comparable credit institutions. The share of loans granted to the ten largest groups of borrowers was 26% in 2019. According to ACRA, these loans amount to more than 300% of the Bank’s first-tier capital under IFRS, which may be a high risk factor for the Bank’s standalone creditworthiness in the current economic conditions.
The Bank’s adequate liquidity and funding position is based on the high volume of liquid and highly liquid assets that provide sufficient coverage on potential outflows and high short-term liquidity ratios. If necessary, the Bank has access to a considerable amount of regulatory, market, and government refinancing instruments.
The Bank’s funding structure is assessed as balanced. A major source of funding for the resource base continues to be corporate funds, the share of which however does not exceed 50% of liabilities. The Bank’s dependence on its largest creditors remains moderate. In 2019, the share of the top ten largest creditors (investors) continued to decrease and amounted to 20% of liabilities (excluding subordinated debt).
Key assumptions
- Cost of risk around 2-3%;
- Maintaining net interest margin below 3%;
- Tier-1 IFRS capital adequacy above at 10-11% 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 state and substantial expansion of its functions.
A negative rating action may be prompted by:
- Weaker involvement of the state in the Bank’s operations as well as decrease in the Bank’s systemic importance.
Rating components
SCA: bb+.
Adjustments: on par with the RF minus 2 notches.
Issue ratings
Credit rating rationale. The below listed issues represent senior unsecured debt of Russian Agricultural Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu to other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit ratings of the issues are equivalent to that of the Bank, AA(RU).
JSC Russian Agricultural Bank, BО-09P (RU000A100GM6), maturity: June 22, 2021, issue volume: RUB 10 bln — AA(RU).
JSC Russian Agricultural Bank, BО-10P (RU000A1011R1), maturity: November 10, 2023, issue volume: RUB 5 bln — AA(RU).
JSC Russian Agricultural Bank, BО-01R-P (RU000A101129), maturity: November 2, 2022, issue volume: RUB 5 bln — AA(RU).
JSC Russian Agricultural Bank, Uncertified BО-02R-R (RU000A101DD0), maturity: January 25, 2023, issue volume: RUB 5 bln — AA(RU).
JSC Russian Agricultural Bank, BO-05R (ISIN RU000A0ZYXJ4), redemption: March 9, 2022; issue volume: RUB 25 bln — AA(RU).
JSC Russian Agricultural Bank, BO-04R (ISIN RU000A0ZYJ42), maturity: December 9, 2020; issue volume: RUB 5 bln — AA(RU).
JSC Russian Agricultural Bank, BO-03R (ISIN RU000A0ZYBT9), maturity: September 28, 2021; issue volume: RUB 7 bln — AA(RU).
JSC Russian Agricultural Bank, BO-02R (ISIN RU000A0JXUC1), maturity: June 21, 2021; issue volume: RUB 10 bln — AA(RU).
JSC Russian Agricultural Bank, BO-06P (ISIN RU000A0ZZPZ3), maturity: October 14, 2022; issue volume: RUB 13 bln, — АА(RU).
JSC Russian Agricultural Bank, BO-07P (ISIN RU000A0ZZVQ0), maturity: November 22, 2038; issue volume: RUB 19.9 bln, — АА(RU).
Credit rating rationale. The issues listed below represent a significant level of subordination with respect to senior unsecured creditors as well as the right of Russian Agricultural Bank to unilaterally refuse to pay income on bonds at its discretion without the creditor having the right to claim unpaid interest. According to ACRA’s methodology, the final credit rating of this type of issue has to be five notches below the standalone creditworthiness assessment (SCA) of the Bank (bb+), B-(RU).
JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, C01E-01 series (RU000A101616), maturity: perpetual, issue volume: EUR 150 mln — B-(RU).
JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 01Т1 series (RU000A0ZZ4T1), maturity: perpetual; issue volume: RUB 10 bln — B-(RU).
JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 09Т1 series (RU000A0ZZ505), maturity: perpetual; issue volume: RUB 5 bln — B-(RU).
JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 31Т1 series (RU000A0ZZUS8), maturity: perpetual; issue volume: RUB 5 bln — B-(RU).
JSC Russian Agricultural Bank, Perpetual subordinated certified unregistered coupon bond, 11B1 series (RU000A0ZZY59), maturity: perpetual; issue volume: USD 50 mln — B-(RU).
Regulatory disclosure
The credit ratings have been assigned to JSC Russian Agricultural Bank and to bonds (RU000A0ZYXJ4, RU000A0ZYJ42, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59, RU000A100GM6, RU000A1011R1, RU000A101129, RU000A101DD0, RU000A101616) issued by JSC Russian Agricultural Bank 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 Relationships Between Rated Entities and the State. 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 rating of JSC Russian Agricultural Bank and credit ratings of bonds (RU000A0ZYXJ4, RU000A0ZYJ42, RU000A0ZYBT9, RU000A0JXUC1, RU000A0ZZPZ3, RU000A0ZZVQ0, RU000A0ZZ4T1, RU000A0ZZ505, RU000A0ZZUS8, RU000A0ZZY59, RU000A100GM6, RU000A1011R1, RU000A101129, RU000A101DD0, RU000A101616) issued by JSC Russian Agricultural Bank were published by ACRA for the first time on April 11, 2017, March 21, 2018, December 8, 2017, October 6, 2017, June 28, 2017, October 22, 2018, December 4, 2018, May 7, 2018, May 7, 2018, November 26, 2018, December 20, 2018, June 28, 2019, November 20, 2019, November 20, 2019, February 10, 2020, and December 18, 2019, respectively. The credit rating of JSC Russian Agricultural Bank and its outlook as well as the credit ratings of the above bonds 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 JSC Russian Agricultural Bank, information fr om publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of JSC Russian Agricultural Bank and statements of JSC Russian Agricultural Bank composed in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit ratings are solicited, and JSC Russian Agricultural Bank participated in their assignment.
No discrepancies between the provided data and the data officially disclosed by JSC Russian Agricultural Bank in its financial statements have been discovered.
ACRA provided additional services to JSC Russian Agricultural Bank. No conflicts of interest were discovered in the course of credit rating assignment.
