The credit rating of JSC CB Solidarnost (hereinafter, the Bank) has been upgraded to reflect the improvement of the capital adequacy assessment from satisfactory to adequate amid the change in ACRA’s approach to assessing the Bank’s ability to generate capital in light of significant changes to the structure of assets following the merger with Bank Joint Stock Company "Moscow Mortgage Agency" (hereinafter, Bank JSC MMA) and continuing changes to the operating profile. The Bank’s rating is also based on its limited business profile assessment, critical risk profile assessment, and adequate funding and liquidity position. The Bank has a moderately low level of creditworthiness.
The Bank is a medium-sized credit institution registered in Samara. The Bank is focused on corporate lending and retail deposits. As of June 30, 2021, the Bank ranked 83rd in terms of assets among Russian banks.
Key rating assessment factors
The limited assessment of the business profile (bb) in particular stems from the Bank’s positions in the sector (55th in terms of capital among Russian banks as of June 1, 2021). Diversification of the Bank’s operating revenue is average, with more than 50% of it formed by interest income on corporate loans. Among other things, the Bank’s activities are focused on carrying out the financial rehabilitation plan, according to which the Bank serves cash flows and goods turnover between Russia, China, and South East Asian countries, in addition to rendering traditional financial services. ACRA notes that although the Bank’s strategy has stabilized after the merger with Bank JSC MMA, its operating efficiency remains low. The quality of corporate governance generally corresponds to the scale and development strategy.
The capital adequacy assessment has been improved from satisfactory to adequate due to the change in ACRA’s approach to assessing the Bank’s ability to generate capital due to significant growth of the Bank’s assets, changes in the business profile (as a result of the merger with Bank JSC MMA in 2020), and achieving profitability in Q1 2021. At the same time, the overall assessment of the ability to generate capital remains neutral. Poor operating efficiency may be the reason for the Bank’s volatile profitability. The N1.2 ratio was 23.9% as of June 1, 2021. According to the Bank, the Tier 1 capital adequacy indicator, which takes into account the entire volume of required provisioning for assets within the financial rehabilitation plan, amounted to 17.2% as of March 31, 2021. The Bank is able to withstand an increase in the cost of credit risk above 500 bps according to the results of the stress test conducted by the Agency.
The critical risk profile assessment is primarily based on the high concentration of the loan portfolio. According to IFRS reporting, as of March 31, 2021, the share of loans provided to the 10 largest borrowers not related to the Bank and its subsidiaries stood at 36.3%. The share of Stage 3 loans is 28.9%. However, ACRA notes that the bulk of problem assets are made up of loans either provided prior to the launch of the financial recovery of the Bank under its current shareholders or received as a result of the merger with Bank JSC MMA. The level of coverage of these loans by reserves under IFRS is around 100%.
Excluding such loans, the total problem debt (Stage 3 loans and loans with high risk) is 5.04% of the cleared portfolio. At the same time, the concentration on the ten largest groups of borrowers is approaching 60%. In addition, when assessing the quality of assets, ACRA takes into account the fact that the Bank’s portfolio contains some potentially problem loans (loans to a company with an unstable financial position, etc.).
The Agency also notes that the Bank’s balance sheet includes a significant volume of non-core assets (investment property, investments in the authorized capital of LLCs, etc.), the volume of which exceeds 20% of common equity.
Factors that are capable of influencing the Bank’s risk profile assessment also include higher accepted market risk (over 75% of common equity as of June 1, 2021) due to growth of the portfolio of debt securities. At the same time, the credit quality of the portfolio is assessed by the Agency as high. The main volume of investments falls on OFZs and bonds included in the Lombard List of the Bank of Russia.
The Bank’s funding and liquidity position is adequate. The Bank has surplus short-term liquidity in ACRA’s base case and stress scenarios thanks to a large volume of cash and liquid securities on its balance sheet (short-term liquidity shortage indicator is RUB 11.2 bln and 13.2%, respectively). The high level of capitalization allows the Bank to maintain a balanced repayment schedule for its assets — the long-term liquidity shortage indicator is 128.7%. The Bank’s resource base is heavily dependent on individuals (76.4% of all liabilities), which determines the moderate concentration on major creditors (depositors). The share of the largest group of creditors (depositors) which are the shareholder of the Bank and its related companies amounts to 9.1% of all liabilities taking into account subordinated debt (additional capital), while the ten largest amount to 16.6%.
- Maintaining the current business indicators as part of the financial rehabilitation plan;
- Keeping the N1.2 ratio above 12% within the 12 to 18-month horizon;
- Maintaining business profitability.
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:
- Improved market positions;
- Decrease in the level of problem and potential problem loans;
- Significantly lower concentration of the Bank’s loan portfolio on the 10 largest groups of borrowers;
- Significant growth of operating efficiency.
A negative rating action may be prompted by:
- Deteriorating business profile assessment;
- Deteriorating capital position due to a return to unprofitable operations;
- Deteriorating liquidity position;
- Growth of dependence on funds of the largest creditors (depositors).
No outstanding issues have been rated.
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 JSC CB Solidarnost was published by ACRA for the first time on May 22, 2019. 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 data provided by JSC CB Solidarnost, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of JSC CB Solidarnost and the financial statements of JSC CB Solidarnost drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and JSC CB Solidarnost 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 additional services to JSC CB Solidarnost. No conflicts of interest were discovered in the course of credit rating assignment.