ACRA has retained the “Rating under revision: developing” status with regard to the credit ratings of SME Bank JSC (hereinafter, SME Bank, or the Bank) and its subordinated debt issue. This reflects the Agency’s understanding of the Bank’s new strategy, which is currently being developed and has not yet been approved, coupled with continuing uncertainty surrounding the selection of a specific capital recovery scenario. ACRA may affirm, upgrade or downgrade the credits ratings of SME Bank and its subordinated debt issue, as well as remove the “Rating under revision: developing” status as the situation develops and additional information becomes available over the next 90 days.
ACRA views the possibility of provision of support to the Bank by Federal SME Corporation (hereinafter, the Supporting Entity, SE, or the Group; holds a 100% stake in the Bank; ACRA rating AAA(RU), outlook Stable) and/or other ultimate owners of the Bank who are related to the state as a positive scenario, which may lead to a higher assessment of capitalization. The negative scenario, on the other hand, implies a continued decline in capital and profitability indicators due to further unforeseen credit losses and/or a lack of external support. The Agency also assumes that radically new plans could emerge to change the ultimate ownership structure of SME Bank as part of initiatives that have been launched to reform development institutions. Previously announced plans to merge SME Bank with JSC "Bank DOM.RF" (ACRA rating A+(RU), outlook Positive) have not yet been implemented, so the Agency continues to exclude them from the baseline scenario.
SME Bank’s current credit rating — BBB(RU) — stems from the satisfactory business profile assessment (bbb), critical risk profile, capitalization and profit assessments, and the adequate funding and liquidity position coupled with strong extraordinary support.
KEY ASSESSMENT FACTORS
ACRA understands that SME Bank and the Group are currently modernizing the Bank’s strategy and business model. The new development plan and new business model parameters are expected to be approved within the next 90 days. The main priority, according to ACRA’s expectations, will continue to be the development of the SME segment, however, the risk-acceptance system and approaches to lending may become more stringent.
The Bank’s further business development and implementation of its mandate will depend no less on the prospects for recovery of capital adequacy. Aggressive growth of the loan portfolio in 2020, a period that is characterized by increased credit risks for SMEs, forced SME Bank to create significant impairment reserves equivalent to the cost of risk in annual terms — almost 9% of the average loan portfolio for H1 2021. Annualized loss on average equity for the same period was 70%. Therefore, SME Bank’s regulatory capital adequacy ratio (N1.2), taking into account the smoothing positive impact from the transition in August 2021 to the finalized regulatory approach in calculating risk-weighted assets, decreased to a significantly more vulnerable 8.6% as of early September 2021 (13.2% at the beginning of 2020). The recognition of significant credit losses was accompanied by a corresponding increase in the share of problem claims in the loan portfolio: according to ACRA’s estimates, at the moment it is about 25%. In addition, the credit risk assessment is still complicated by a significant volume of loans with either long investment periods or borrowers who do not have a proven track record of stable returns.
Several options for providing external support to the Bank’s capital adequacy indicators are currently being considered, however, the approval of a specific scenario has not yet taken place and ACRA expects this to happen in the next 90 days. The Agency’s opinion on the likelihood of the Bank receiving external support may be a factor in upgrading or downgrading credit rating in the future.
KEY ASSUMPTIONS
- Continued uncertainty regarding measures to restore the Bank’s capitalization, its future activities within the framework of the developing business model and plans to implement the reform of development institutions.
potential outlook or rating change factors
The “Rating under revision: developing” status assumes with equal probability either an upgrade or a downgrade of the rating within the next 90 days.
Removal of the “Rating under revision: developing” status and affirmation or upgrade of the credit rating may be prompted by:
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Approval and implementation of measures to recover capital indicators;
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Change in ownership structure involving an organization with higher propensity to support the Bank in comparison to the current owners;
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Considerable improvement of asset quality.
Removal of the “Rating under revision: developing” status and downgrade of the credit rating may be prompted by:
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Further decline in capitalization indicators that increases regulatory risks;
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Lack of support from the Group;
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Weaker business profile;
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Deterioration in funding and/or liquidity positions.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bb-.
Adjustments: none.
Support: SCA +4 notches.
issue ratings
Rationale. The bond listed below is a senior unsecured debt instrument of SME Bank JSC. According to ACRA’s methodology, the credit rating of this issue type is set at three notches below the final credit rating of the Bank, which is BBB(RU).
SME Bank JSC, series C01 (RU000A102HA5), maturity date: December 3, 2030, issue volume: RUB 720 mln — BB(RU), status “Rating under revision: developing”.
REGULATORY DISCLOSURE
The credit ratings have 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, the Methodology for Analyzing Rated Entities Associated with a State or a Group, 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 on the National Scale for the Russian Federation was also applied to assign the credit rating to the above issue.
The credit ratings of SME Bank JSC and the bond (ISIN RU000A102HA5) issued by SME Bank JSC were published by ACRA for the first time on December 29, 2017 and March 25, 2021, respectively. The credit rating of SME Bank JSC and its outlook and the credit rating of the bond issue are expected to be revised within 90 days following the publication date of this press release.
The credit ratings were assigned based on data provided by SME Bank JSC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of SME Bank JSC and the financial statements of SME Bank JSC drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit ratings are solicited, and SME Bank JSC participated in their assignment.
In assigning the credit ratings, 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 SME Bank JSC. No conflicts of interest were discovered in the course of credit rating assignment.
