ACRA has affirmed the credit rating of Promsvyazbank PJSC (hereinafter, PSB, or the Bank) at AA(RU), outlook Stable, and the Bank’s bond issue (ISIN RU000A101U38) at AA(RU).
The credit rating of the Bank is based on its high systemic importance, which stems from its status as Russia’s key defense industry bank and also very strong state influence on its creditworthiness. Moreover, ACRA expects the Bank’s positions in Russia’s military-industrial complex to strengthen. The standalone creditworthiness assessment (SCA) of PSB reflects its moderately strong business profile, adequate capital adequacy, low risk profile assessment, and adequate funding and liquidity position.
In ACRA’s opinion, in the event of a systemic economic stress scenario and/or significant deterioration in the Bank’s standalone creditworthiness, the state will provide it with sufficient extraordinary support in the form of capital and/or liquidity to meet creditors’ claims. Therefore, in its rating analysis, ACRA applied the Methodology for Analyzing Relationships Between Rated Entities and the State.
Key rating assessment factors
The high systemic importance assessment of PSB is based on the dominating role played by the Bank in servicing Russian defense enterprises. This is evidenced by the substantial share of defense industry funding that goes through the Bank due to the consolidation of defense orders and other large government contracts. Currently, defense loans and capital are transferred actively to the Bank from other banks, and by the end of 2021, the Bank’s portfolio is expected to consolidate about 70% of state defense contracts.
In addition, the Bank holds important positions in the Russian banking system and therefore its default may cause a crisis of confidence in relation to the entire Russian banking sector and the country’s state-owned banks in particular; it may also trigger a systemic banking crisis and give rise to significant financial, reputational, and social risks for the state. PSB is active in the M&A market.
Another important contributor to the Bank’s high systemic importance is the significant amount of state support in the form of capital and liquidity granted to the Bank in 2017–2020.
Very strong influence of the state on the Bank’s creditworthiness. The Bank is wholly owned by the Russian Federation. The propensity of the state to provide the Bank with extraordinary support in the form of capital and/or liquidity, as well as prior state support to ensure an adequate level of capital and liquidity and to compensate for outflows of client funds also indicate the very strong ties between the Bank and the state.
The main factor limiting PSB’s rating at “on par with the RF minus 2 notches” is the dominant but not yet key positions of the Bank in the banking services sector for the Russian defense industry.
The moderately strong business profile (a-) is determined primarily by the market positions of the Bank and the universal nature of its operations. The Bank’s strategy looks quite aggressive, which is dictated by its status as a key defense industry bank and its desire to retain its position in traditional banking segments. At the same time, the operating efficiency of PSB is relatively low (in 2019, the NIM (net interest margin) was about 3% and CTI (cost to income) amounted to 55%, although signs of a continuing upward trend have been demonstrated in 2020).
The adequate capital position is based on acceptable capital adequacy ratios under both statutory ratios (N1.2 stood at 10.45% as of September 1, 2020) and Basel standards (Tier 1 capital exceeds 10%), which allows the Bank to withstand growth in credit risk of more than 500 bps. At the same time, the five-year averaged capital generation ratio is negative, which is due to the allocation of significant reserves in 2017 and 2018.
The critical risk profile assessment is the result of the poor quality of the loan portfolio (as of June 30, 2020, the portfolio prior to reserves amounted to 57% of assets; a 55% increase over the past 12 months) due to a heightened share of problem loans — 17.3% of loans (of which 16.6% are NPL90+ and 0.7% are loans that ACRA considers to be problem or potentially problem loans based on an analysis of the 30 largest groups of borrowers; at the same time, problem loans were 91% covered by reserves) and the share of the 10 largest groups of borrowers. The portfolio’s concentration on high-risk industries is moderate (no more than 70% of common capital), and the level of market risk is acceptable.
The adequate liquidity position is due to the sufficient volume of highly liquid assets to cover the potential outflow of funds, and therefore, the short-term liquidity shortage indicator demonstrates a surplus in both the base case and stress scenarios. There are no significant liquidity imbalances for longer periods, while large repayments are not expected in the next 12 months.
Well-balanced funding profile. The resource base of the Bank has a low level of diversification and is focused on the largest lenders, as the amount of funds allocated by state-owned organizations is significant.
Key assumptions
- Provision of non-financial state support to the Bank;
- Provision of sufficient capital and liquidity by the state if necessary;
- Maintaining the current business model within the next 12 to 18 months.
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:
- Higher assessment of state support due to increased systemic importance of the Bank for the Russian economy.
A negative rating action may be prompted by:
- Loss of shareholder or operational control over PSB by the state;
- Significant decrease in the level of systemic importance of the Bank.
Rating components
SCA: bbb+.
Adjustments: state support, on par with the RF minus 2 notches.
Issue ratings
Exchange-traded interest-bearing non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-01 series (RU000A101U38), maturity date: June 23, 2022, issue volume: RUB 10 bln — AA(RU).
Credit rating rationale. The issue represents senior unsecured debt of the Bank. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of the Bank, i.e. AA(RU).
Regulatory disclosure
The credit ratings of Promsvyazbank PJSC and the bond issued by Promsvyazbank PJSC (ISIN RU000A101U38) have been assigned under the national scale for the Russian Federation based on the Methodology for Analyzing Relationships Between Rated Entities and the State, 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 applied to assign the credit rating to the issue listed above.
The credit rating of Promsvyazbank PJSC and the credit rating of the bond issued by Promsvyazbank PJSC (ISIN RU000A101U38) were published by ACRA for the first time on October 30, 2018 and June 25, 2020, respectively. The credit rating of Promsvyazbank PJSC and its outlook and the credit rating of the bond issued by Promsvyazbank PJSC (ISIN RU000A101U38) are expected to be reviewed within one year following the publication date of this press release.
The credit ratings were assigned based on the data provided by Promsvyazbank PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of Promsvyazbank PJSC and the financial statements of Promsvyazbank PJSC drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Promsvyazbank PJSC participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Promsvyazbank PJSC in its financial statements have been discovered.
ACRA provided additional services to Promsvyazbank PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
