The AAA(RU) credit rating of State Corporation “Bank for Development and Foreign Economic Affairs (Vnesheconombank)” (hereinafter – Vnesheconombank, or VEB) is assigned at the level equivalent to financial obligations of the Government of the Russian Federation based on very high probability of extraordinary support from government authorities due to its high systemic importance for the Russian economy and essential state influence on VEB’s creditworthiness. Standalone creditworthiness of VEB does not constitute a factor affecting its credit rating.
Vnesheconombank is not a commercial bank; special Law No.82-FZ that came into force on June 4, 2007 governs its activities. Under the Memorandum on Financial Policies, Vnesheconombank issues loans, guarantees and suretyships under projects with a payback periods exceeding 5 years and total value of more than 2 billion Rubles.
ACRA expects that under a systemic economic stress scenario and (or) in case of a material decline in own creditworthiness, the Russian Government will provide sufficient amount of extraordinary support in form of equity capital or liquidity in order to satisfy claims of the creditors. The above is based on the assumptions detailed below.
Key rating assessment factors
Very high systemic importance. Vnesheconombank is a development institution performing a unique function of financing strategically important investment projects according to its mandate as defined by the law, which commercial banks cannot perform due to higher risks and regulatory factor. VEB’s scope of activities is substantial for the Russian economy: its assets amount to almost 22% of fiscal expenses in 2017. We believe it is currently unlikely that Vnesheconombank’s functions will be delegated to any other government institutions or private entities.
In ACRA’s opinion, in a scenario of VEB’s default, the government will face a very significant loss of budget funds: both direct (RUB 563 bln deposited with Vnesheconombank as at 31.03.2017) and indirect (through suspended financing, and in some cases, suspended implementation of high priority federal infrastructure projects). In addition, according to ACRA’s opinion, VEB’s default will result in significant reputational loss of the Russian Government due to lower trust of investors and creditors of the public economy sector in various industries.
Very high state influence on creditworthiness. VEB was established in 2007 based on, and in compliance with, Federal Law No.82-FZ.
Other factors of very strong connection between VEB and the state, in ACRA’s opinion, include: (1) legislative immunity from bankruptcy procedure; (2) government’s willingness to provide extraordinary support through fiscal mechanisms as set forth in the law: annual capital injections of RUB 150 bln are budgeted for 2017-2019; (3) substantial amount of financial support provided in 2007-2017 (approximately RUB 865 bln) including extraordinary support that was quite promptly provided in a challenging environment of VEB’s liquidity strain in 2016.
Vnesheconombank’s own creditworthiness level depends on government financing and efficient implementation of the new development strategy. Change of VEB’s management team and its role as redefined by the government resulted in approval of a new development strategy (going through 2021) in December 2016, focusing on investments into “catching-up” development infrastructure projects, downstream industries, hi-tech projects, repurposing military and industrial complex to non-defense production, and support of non-resource exports. As far as we understand, key medium-term objectives new management faces are: (1) optimizing organizational set-up and increased operating efficiency; (2) restructuring “old” portfolio of non-performing loans; (3) selling subsidiaries inconsistent with the strategic focus (first and foremost, Sviaz-Bank, Globex, and Prominvestbank in the Ukraine).
We believe that considering complication and complexity of the “old” non-performing loans portfolio as well as weak economy, any notable pay-offs from restructuring this portfolio are rather likely in the long-term. Whether activities using “new” principles and areas are efficient will primarily depend on the quality of investment process under development and efficacy of internal and external risk reduction mechanisms. Financial indicators of Vnesheconombank’s activities in the period of new strategy implementation will also depend on the amount of financing for “special” projects and on the extent to which the government will compensate losses from such projects.
We note VEB’s weak but progressively improving financial indicators. The level of troubled debt (overdue and individually impaired) remains high (37.9% of loans to clients and net investments into leasing as of end-2016); however, this risk is largely compensated by provision coverage that grew from 50% to 71% in 2016. After a substantial loss (RUB 112 bln) in 2016, Vnesheconombank generated profits of RUB 14.1 bln in the first quarter of 2017. Considering the on-going transformation, stable financial results are associated with some uncertainty. We note increased capital adequacy ratio of VEB at 15.2% in Q1 2017 and we believe it will remain in the 14.5%-16% range in the next 12 to 18 months due to: (1) planned capital injections by the government; (2) reduced or slightly increased amount of risk-weighted assets.
Public debt repayment will peak in 2018 (approximately RUB 169 bln). Considering the budgeted financing, highly probable additional financial support from the government and financial institution’s own resources, we expect no problems in performance of these obligations for the lack of any significant external shocks.
Key assumptions
- Sufficient amount of government support to pay the creditors in the coming years;
- Development in line with the 2021 strategy approved in 2016.
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:
- Material decline of VEB’s systemic importance for the Russian economy.
Rating components
- Standalone creditworthiness assessment (SCA): none.
- Adjustments: none.
- Support: on par with the Russian Federation.
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, the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. In order to determine specific factors of own creditworthiness, elements of the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation were used.
A credit rating has been assigned to Vnesheconombank for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (July 10, 2017).
The assigned credit rating is based on the data provided by Vnesheconombank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements and management reporting of Vnesheconombank. The credit rating is solicited, and Vnesheconombank participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Vnesheconombank in its financial statements have been discovered.
ACRA provided additional services to Vnesheconombank. No conflicts of interest were discovered in the course of credit rating assignment.
