The credit rating of AO MUFG Bank (Eurasia) (hereinafter, the Bank) is based on the very high likelihood of extraordinary support from the parent entity, that has high creditworthiness (hereinafter, the Group). The Bank is characterized by the high standalone creditworthiness assessment (SCA) that takes into account strong capital adequacy, adequate risk profile, liquidity and funding positions, and medium business profile.
As of August 1, 2020, the Bank ranked 72nd by assets and 50th by equity in the Russian market. The Supporting Organization, the largest Japanese bank and a key financial entity of the Group, is the sole shareholder of the Bank. The Bank’s business includes universal banking and lending services to Japanese companies operating in Russia and other corporate customers of the Group, as well as interbank and foreign exchange transactions.
Key rating assessment factors
Very high likelihood of extraordinary support from the shareholder. In ACRA’s opinion, in case of need, the Supporting Organization may provide the Bank with long-term and short-term financing and inject capital. ACRA assesses the country risk of the Supporting Organization’s jurisdiction (Japan) against the country risk of Russia and the Supporting Organization’s creditworthiness as strong.
The degree of integration between the Bank and the shareholder is assessed as very strong in view of the following:
- There is a pronounced operational integration (the Bank’s strategic business lines, risk management and corporate governance standards and procedures are established by the Supporting Organization);
- The Supporting Organization issues guarantees for most loans issued by the Bank;
- The Group remains one of the main sources of liquidity for the Bank.
Taking into account the small size of the Bank compared to its Supporting Organization and possible high reputational risks for the Supporting Organization in case the Bank goes bankrupt, the credit rating of the Bank is determined as on par with the Russian Federation.
The business profile reflects the Bank’s middle positions in the Russian banking system and moderate diversification of operating income that mainly stems from interest payments on corporate loans and bank deposits and income from foreign exchange transactions.
The Bank’s strategy primarily aims to providing a full range of financial services to the Group’s customers in Russia. In the next 12–18 months, the Bank has no plans to develop new business lines and take additional risks associated with that.
The ownership structure of the Bank is completely transparent. The assessment of the corporate governance strategy and quality is high.
Very high loss absorption buffer. The Bank has maintained high regulatory capital adequacy ratios (as of August 1, 2020, the N1.2 core capital adequacy ratio was 111.2%), which allows the Bank to comfortably withstand a material increase of cost of risk by more than 500 bps in the next 12–18 months, according to ACRA’s stress tests. The extraordinary level of capital adequacy is due to the fact that so far the Bank has employed a policy of keeping the retained earnings level at 100% coupled with the fact that guarantees provided by the Group help prevent the over-inflation of risk-weighted assets.
Over the past five years, the averaged capital generation ratio (ACGR) has been 919 bps due to the stable profitability of the Bank in conjunction with other favorable operating performance indicators: for the past three years, the CTI (cost to income) ratio amounted to about 28.9% and the NIM (net interest margin) to about 5%.
Adequate risk profile. The Bank’s risk management system matches the specifics and scale of its business; the system is based on the requirements of the Group and close supervision by the Supporting Organization.
As of July 1, 2020, the Bank had no overdue or impaired loans, which is a result of its strict credit underwriting criteria that is focused primarily on the subsidiaries of Japanese companies and international corporations with a high level of creditworthiness. Most of the Bank’s loans are covered by guarantees issued by the Supporting Organization and the parent companies of borrowers. The risk profile of the Bank is impacted by the high concentration of the portfolio on the top 10 groups of borrowers (about 64.6% of the portfolio).
The level of operational risk does not affect the risk profile assessment. The market risk of the Bank is insignificant.
The funding and liquidity factor is assessed as adequate. The Bank demonstrates a sufficient surplus of short-term liquidity in both the base case and stress scenarios of ACRA. The Agency assesses the Bank’s long-term liquidity position as strong.
In addition, the Bank has access to significant credit facilities from the parent bank and other credit institutions, as well as to regulatory funding.The funding factor is pushed down by the concentration of the Bank’s resource base on corporate customers’ funds. As of July 1, 2020, the share of funds of the largest lender amounted to about 30.1% of liabilities, and the share of the top 10 lenders was 77% of liabilities.
The Bank’s funding is based on corporate deposits and current accounts, as well as funds provided by the parent organization: 62.5% and 37.5% of liabilities respectively as of July 1, 2020. At the same time, the risks of high concentration on corporate funds has been taken into account in assessing the concentration on the funds of the largest lenders, therefore, the Agency has not reduced the funding factor assessment in this regard.
Key assumptions
- The parent entity will retain its shareholding and operating control over the Bank;
- Maintaining the current business model, operational performance, and the high quality of the loan portfolio and other assets.
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 negative rating action may be prompted by:
- Declining involvement of the Group in its Russian business and a change in the shareholding structure of the Bank;
- Material deterioration in the Bank’s capital adequacy ratios, performance and loan portfolio quality.
Rating components
SCA: a+.
Adjustments: none.
Support: on par with the RF.
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, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating of AO MUFG Bank (Eurasia) was published by ACRA for the first time on October 2, 2018. The credit rating 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 AO MUFG Bank (Eurasia), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was carried out using the IFRS statements of AO MUFG Bank (Eurasia) and the financial statements of AO MUFG Bank (Eurasia) drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and AO MUFG Bank (Eurasia) participated in its assignment.
No material discrepancies between the provided information and the data officially disclosed by AO MUFG Bank (Eurasia) in its financial statements have been discovered.
ACRA provided no additional services to AO MUFG Bank (Eurasia). No conflicts of interest were discovered in the course of credit rating assignment.
