ACRA has downgraded the credit rating of Modulbank (hereinafter, the Bank) due to a deterioration in the Bank’s risk profile assessment to weak because of a significant growth of the Bank’s investments in non-core assets (property) on its balance sheet. The Bank’s standalone creditworthiness assessment (SCA) is primarily based on the satisfactory market position coupled with the pronounced concentration of the business strategy, as well as the satisfactory capital adequacy and the adequate liquidity and funding position.

Modulbank is a small bank that is focused on servicing small and micro-sized businesses via its own online platform. As of April 1, 2021, the Bank ranked 150th in terms of capital in Russia.

Key rating assessment factors

The satisfactory business profile assessment reflects the low share of the Bank in the Russian banking market and its noticeable positions in the small business segment.

The Bank’s 2021–2023 strategy assumes that it will continue to moderately develop its business, providing integrated services to small and micro-sized businesses (bank account services, acquiring, accounting, guarantees under 44-FZ, etc.), with a focus on developing leasing and optimizing expenses. This allows the Bank to sufficiently diversify its operating income. In 2020, the Herfindahl-Hirschman index was 0.29.

The satisfactory capital adequacy assessment is due to the Bank’s moderate capital adequacy regulatory ratios under national standards (N1.2 at 12.6% as of April 1, 2021). Compared to April 1, 2020, the growth in capital is due to profit from the Bank’s primary activities, the sale of a company that belonged to the Bank (the Bank received property as payment for the deal), financial support from the shareholder and disposal of the Bank’s investments in its own shares for property.

According to ACRA’s calculations, the Bank’s average capital generation ratio (ACGR; including the Bank’s one-off income in 2020) amounted to 17 bps for 2017–2020. Prior to 2017, Modulbank was in the investment stage and recorded losses.

The stress test conducted by ACRA, which took into account potential impairment of loans, as well as possible changes to capital due to revaluation of the Bank’s investments, confirmed its capacity to sustain an increase in credit risk (ranging from 300 to 500 bps) without violating capital adequacy requirements. The Bank’s low operational efficiency continues to constrain the capital adequacy assessment: the average net interest margin (NIM) under IFRS in 2018–2020 stood at 3.4%, while the cost-to-income ratio (CTI) was 82%.

The Bank’s risk profile assessment has been downgraded from satisfactory to weak due to the higher volume of investments in non-core assets for the Bank (property), and an increase in the share of problem loans to enterprises, while the quality of other assets and the guarantee portfolio has been maintained.

In 2020, a significant amount of investments (nearly 70% of Tier-1 capital as of April 1, 2021) in property (mainly commercial property) was formed on the Bank’s balance sheet as a result of several operations. According to ACRA, there is an increased risk of impairment of these investments, which may significantly affect the Bank’s creditworthiness.

The volume of loans issued to companies and independent entrepreneurs rose insignificantly since April 1, 2020, and does not exceed 10% of assets. However, ACRA expects a growth of the portfolio in the future due to the development of lending by the Bank. At the same time, the Agency notes a significant increase in the share of problem loans in the loan portfolio (up to 39% of the portfolio) in the period starting April 1, 2020, which are almost fully covered by reserves.

Adequate funding and liquidity position. As of April 1, 2021, the Bank was able to withstand a significant outflow of client funds in both the base case scenario (up to RUB 13 bln) and the stress scenario (surplus of 24% of total liabilities) applied by ACRA. On longer-term horizons, ACRA sees no imbalances (the long-term liquidity shortage indicator, LTLSI, exceeds 75%).

ACRA notes the Bank’s increased concentration on funds raised from corporate clients and independent entrepreneurs, which is characteristic of its business model. As of April 1, 2021, their share exceeded 90% of the total liabilities. The high concentration of funding sources is counterbalanced by the low share of funds of the ten largest lenders (less than 4% of the total liabilities of the Bank).

Key assumptions

  • Maintaining the current strategy and business model over the next 12–18 months;
  • Maintaining the N1.2 capital adequacy ratio (CAR) above 12% in the next 12–18 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:

  • Significant improvement in the quality of assets;
  • Higher operational efficiency of the Bank.

A negative rating action may be prompted by:

  • The N1.2 CAR falling below 12%, and lower capacity to absorb risks related to assets;
  • Deterioration in the quality of loans coupled with an increase in the size of the loan portfolio;
  • Growth of investments in non-core assets for the Bank;
  • Deterioration in liquidity position.

Rating components

SCA: bb-.

Adjustments: none.

Support: 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 the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of Modulbank was published by ACRA for the first time on May 31, 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 Modulbank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Modulbank and the financial statements of Modulbank drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and Modulbank participated in its assignment.

In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

ACRA provided no additional services to Modulbank. No conflicts of interest were discovered in the course of credit rating assignment.

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Analysts

Svetlana Gromova
Expert, Financial Institutions Ratings Group
+7 (495) 139 04 80, ext. 221
Ivan Pestrikov
Expert, Financial Institutions Ratings Group
+7 (495) 139 04 80, ext. 135
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