The credit rating assigned to AK BARS Bank (hereinafter, the Bank) is still a result of the adequate assessments of business profile and capital position, weak risk profile, and satisfactory position in funding and liquidity. The rating is backed by the high likelihood of extraordinary support from the shareholder.
The Agency retains the Positive outlook in expectation that the Bank’s risk profile will most likely improve within the 12 to 18-month horizon driven by higher quality of the loan portfolio, regardless that the problem asset ratio is volatile in 2020.
The Bank is a large regional universal bank focused on SMEs and consumer lending services, mostly mortgage loans. The Bank is among top 20 banks by equity and assets in Russia. The Bank operates in five federal districts of Russia, benefiting on 212 local offices.
Key rating assessment factors
High likelihood of extraordinary support. In ACRA’s opinion, a potential default of the Bank may disrupt the bank system in the Republic of Tatarstan (RT) and push up reputational risks for the RT. Irrespective that the Bank is not a key taxpayer in the RT, ACRA assesses risks of deteriorating financial status of the Bank as significant for the local budget. The Bank perform an important transactional function for the RT budget funds and keeps on its accounts about 13% of total retail deposits in the republic. The Bank participates in a range of socially important projects (public transport payment system, electronic payments), in which it serves 100% of retail payments. On numerous occasions in previous years, the Bank received substantial volumes of financial assistance from the shareholder.
Adequate business profile (bbb) is characterized by a steady franchise of the Bank in the RT banking market and its role as a reference bank for the RT. The assessment is supported by the high diversification of the Bank's operating income. The strategy of the Bank is aimed at developing its business as a universal credit institution, at both the RT and the federal levels. The Agency notes the adequacy of macroeconomic assumptions of the Bank’s strategy. The key element of the strategy until 2021 is a plan to increase lending and expand the range of other financial services offered to individuals and SMEs.
Adequate assessment of loss absorption buffer. The Agency notes the decrease in capital adequacy ratios (N1.2 equaled 11.3% as of October 1, 2020, and Tier-1 stood at 14.58% as of September 30, 2020); it believes that such decreasing trend may remain within the 12 to 18-month horizon due to the growth in the Bank's loan portfolio. At the same time, ACRA expects that the Bank’s own capacity to generate capital will further increase (the averaged capital generation ratio, ACGR, grew in 2015–2019 and totaled 79 bps) after the unfavorable year of 2015 drops out of the calculations. Further on, the capital adequacy factor may experience some pressure from the falling NIM (3.3% for 2017–2019) and CTI (50% for 2017–2019). The current loss absorption buffer allows the Bank to withstand an increase in the cost of risk of no more than 300–500 bps in the next 12–18 months without a breach of the regulatory ratios.
Weak risk profile is primarily determined by the quality of the Bank’s loan portfolio. As of September 30, 2020, the share of problem loans has decreased to 10.1% (vs 11.4% as of September 30, 2019), and in mid-2020, this share was as high as 11.6%. The current coverage ratio is 52.9%. The share of loans granted to top 10 groups of borrowers amounted to 21.3% as of September 30, 2020. The Agency expects the share to decrease if the Bank’s plans to expand its portfolio of retail and SME loans materialize. On the other hand, we expect the share of problem loans in the Bank's portfolio to decrease due to, among other things, falling volume of NPL90+.
The fact that the Bank continues holding non-core assets on its balance sheet (about 15% of Tier 1 capital) limits the risk profile assessment. The quality of the Bank's risk management system is assessed by ACRA as satisfactory.
Satisfactory position in funding and liquidity. ACRA assesses the Bank’s capability of withstanding an outflow of funds within a relatively short period as high, which is supported by the value of the short-term liquidity shortage indicator (STLSI). At the same, the credit institution’s capability to perform its obligations within the 12 to 18-month horizon depends on the willingness of the largest creditors/depositors to extend the period of holding their funds with the Bank. In view of the fact that current accounts and deposits of the Bank’s shareholders as well as funds of legal entities controlled by the RT represent the bulk of the Bank’s funding, the Agency assesses the liquidity shortage risk as low. As of the end of September 2020, legal entities and state-owned companies accounted for 65.1% of the funding base. ACRA notes an increased concentration on the largest lenders: the share of top 10 groups of lenders in the total volume of the Bank’s liabilities was almost 55% as of the end of September 2020. The Agency notes the substantial dependence of the Bank on funds held by various republican authorities and agencies.
Key assumptions
- The Bank will maintain its current business model aimed at increasing the share of market business;
- N1.2 will be higher than 9% in the next 12–18 months;
- The share of problem and potentially problem loans will not exceed 15%;
- NIM will be 2.5–3.5%;
- The Bank will maintain its current funding profile.
Potential outlook or rating change factors
The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Sustainable improvement in the loan portfolio quality, while the assessment of other risk profile components does not worsen;
- Declining concentration on the largest groups of lenders and funding sources.
A negative rating action may be prompted by:
- Declining capital adequacy ratios;
- Share of problem and potentially problem loans going above 15%;
- Aggressive expansion of the loan portfolio;
- Deteriorating liquidity position.
Rating components
SCA: bbb-.
Adjustments: none.
Support: state support, +3 notches to SCA.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups under the National Scale for the Russian Federation, Methodology for Analyzing Relationships Between Rated Entities and the State, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.
The credit rating assigned to AK BARS Bank was first published by ACRA on December 11, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.
The assigned credit rating is based on the data provided AK BARS Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS financial statements of AK BARS Bank and statements of AK BARS Bank composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and AK BARS Bank participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by AK BARS Bank in its financial statements have been discovered.
ACRA provided additional services to AK BARS Bank. No conflicts of interest were discovered in the course of credit rating assignment.
