The credit rating of JSCB «Energobank» (hereinafter, the Bank) stems from the Bank’s satisfactory business profile coupled with strong capital adequacy, critical risk profile, and satisfactory liquidity and funding, which reflects the Bank’s concentration on the largest creditors’ funds.
The Bank carries out its operations mainly in the Republic of Tatarstan, where it has a sustainable market position (as of April 1, 2020, the Bank ranked 4th in terms of assets). The Bank has a low share in the Russian banking market: as of March 1, 2020, it ranked 119th in equity and 132nd in assets. The Bank’s main activities are lending to agribusiness enterprises, as well as construction and trade companies, and collateral retail lending. I. N. Khairullin currently has a controlling stake in the Bank: he controls 50% in JSC “Edelweiss Corporation”, which in turn owns 99% of the Bank’s shares. The remaining 50% of shares in JSC “Edelweiss Corporation” are an inheritance property of the deceased A. N. Khairullin, the brother of I. N. Khairullin, up to the moment of succession and are in trust management of I. N. Khairullin.
Key rating assessment factors
The business profile assessment (bb) reflects the Bank’s relatively low share in the Russian financial services market, as well as dependency of its operating income upon interest on loans provided to corporate borrowers, and its pronounced regional concentration of business.
The Bank’s operating income diversification improved in 2019, however, it is still relatively low. Hence, the Herfindahl-Hirschman index stood at 0.4, which indicates increased concentration on corporate lending (nearly 61% of operating income). The quality of the Bank’s management is assessed by ACRA as satisfactory, corresponding to the average level in the Russian banking sector as a whole. The organizational structure of the Bank matches the scale and specifics of its business. The ownership structure of the Bank is currently transparent, however, its operations are linked with companies affiliated with the Bank’s owners. In its further assessment, ACRA will take into account changes in the shareholder structure after the completion of inheritance procedures.
The Bank’s strategy for 2020–2022 envisages a conservative increase in retail lending, as well as lending to small and medium-sized enterprises, with a simultaneous improvement in the loan portfolio quality and a decrease of its sectoral concentration. At the same time, the Bank will continue to raise capital and boost the efficiency of its business by improving remote service channels.
ACRA assesses the Bank’s capital adequacy as strong, considering consistently high capital adequacy ratios coupled with the Bank’s stable ability to generate capital through income. The Bank’s common capital adequacy ratio (N1.2) under RAS was 24.9% as of March 1, 2020. The Bank’s operations have been profitable in the last five years, which contributed to the fairly high average capital generation ratio (ACGR = 191 bps). According to ACRA’s stress test, the Bank is capable of withstanding a gain in the cost of risk of over 500 bps without breaching the statutory capital adequacy ratios.
Profitability indicators are supported by moderately high net interest margin (NIM = 6.3% between 2017 and 2019). The Bank is characterized by the high efficiency of operations: the average operating efficiency (CTI) has reached 39.7% for the last three years.
The Bank’s critical risk profile is due to the low quality of the loan portfolio and its concentration on companies that have signs of being related to the Bank. As of
April 1, 2020, the concentration on the ten largest borrowers was 37.2%. The loan portfolio is generally characterized by a high share of problem loans (around 38% of the total portfolio as of April 1, 2020). These loans are 76% covered by reserves. The share of NPL90+ fell year-on-year and amounted to 5.8% (these are 98.7% covered by reserves).
It is worth noting that the major part of problem loans are still loans to borrowers working in agriculture (nearly 39% of the loan portfolio) and those bearing signs of related parties.
The quality of the Bank’s risk management system is assessed by ACRA as satisfactory.
The portfolio of liquid securities (18% of assets) is mainly made up of investments in government bonds. The market risk is insignificant, while the operational risk is assessed as moderate.
Satisfactory funding and liquidity position. The Bank has a surplus of short-term liquidity in ACRA’s base case and stress (the surplus is around 20%) scenarios. The Bank’s liquidity is supported by a high-quality portfolio of unencumbered debt securities. On longer-term horizons, ACRA sees no significant imbalances (long-term liquidity shortage indicator, LTLSI, is 67%, which is an acceptable level).
According to the Agency, the Bank’s funding structure is sufficiently diversified by sources, but the increased concentration on the funds of the largest groups of creditors negatively affects the factor’s assessment.
Key assumptions
- Maintaining the current business model within the 12 to 18-month horizon;
- Maintaining the current volume of loan portfolio in 2020;
- Cost of credit risk within 7%.
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:
- Significant decline in the volume of problem loans coupled with higher reserve requirements;
- Trimming lending to agribusiness enterprises;
- Lower concentration of the loan portfolio on the ten largest borrowers;
- Lower funding concentration on the largest creditors.
A negative rating action may be prompted by:
- Significant decline in capital adequacy ratios;
- Lower business efficiency and profitability;
- Considerable increase in the share of problem loans;
- Deterioration in liquidity position.
Rating components
SCA: bb-.
Adjustments: none.
Issue ratings
There are no outstanding issues.
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 and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of JSCB «Energobank» was first published by ACRA on May 20, 2019. The credit rating of JSCB «Energobank» and its outlook are expected to be revised within one year following the publication date of this press release.
The credit rating was assigned based on the data provided by JSCB «Energobank», information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the financial statements of JSCB «Energobank» drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and JSCB «Energobank» participated in its assignment.
No material discrepancies between the provided information and the data officially disclosed by JSCB «Energobank» in its financial statements have been discovered.
ACRA provided no additional services to JSCB «Energobank». No conflicts of interest were discovered in the course of credit rating assignment.
