ACRA UPGRADES PROMSVYAZBANK PJSC TO AA+(RU), OUTLOOK STABLE, AND BOND ISSUES TO AA+(RU)

The credit rating of Promsvyazbank PJSC (hereinafter, PSB, or the Bank) has been upgraded in view of the change to the assessment of the likelihood of provision of extraordinary support, which stems from actual and expected growth in the scale of the Bank’s business and transactions related to PSB’s legally defined role, including taking into account the state’s regular contributions to the capital of the Bank and the growth in the volume of funds that defense industry enterprises hold in accounts with the Bank.

ACRA has simultaneously upgraded the Bank’s standalone creditworthiness assessment (SCA) due to the growth in profitability since operations began under the new business model and higher capital adequacy, as well as due to the exclusion problem loans from the loan portfolio that are unrelated to the current development strategy and fully covered by reserves.

From mid-2019 to the end of H1 2021, the share of state defense contracts serviced by the Bank rose from 30% to almost 70%. At the same time, the number of the Bank’s defense industry clients has more than doubled. Growth of active operations is taking place at the same time as an increase in the volume of funds of defense industry companies deposited with the Bank. Over the aforementioned period, the volume of corporate funds raised by PSB (excluding funds from the state and government bodies) increased by almost RUB 1 tln (from June 30, 2020 to June 30, 2021 growth equaled around RUB 700 bln), with defense industry companies accounting for the lion’s share.

The state regularly provides capital injections to the Bank, ensuring its ability to increase lending to defense segments of the economy as per the current development strategy. From 2019 to 2020, total planned provision of additional capital to PSB by the state and from other banks amounted to around RUB 58 bln, including the addition of Svyaz-Bank’s shares to the charter capital of PSB and its subsequent merger in 2020. In 2021–2022, the Bank also expects to receive additional capitalization from both the state and other banks as part of the defense industry loan cession program. In addition, the size of PSB’s common capital increased by RUB 27 bln in 2021 due to a subordinated deposit received upon the merger with JSC ROSCOSMOSBANK having its status changed to perpetual.

The Bank has recorded significant growth in terms of key indicators of activity, in particular, assets, equity and client account balances increased by more than 40% in the period from July 1, 2020 to July 1, 2021. PSB’s assets accounted for around 3% of the assets of the Russian banking sector, the share of funds of corporate clients exceeded 4%, and the share of loans provided to them exceeded 3%.

ACRA performed the rating analysis using its new Methodology for Analyzing Rated Entities Associated with a State or a Group. The Bank’s credit rating is primarily determined by its important role for the state, which stems from its status as Russia’s key defense industry bank and also very strong state influence on its creditworthiness. Moreover, ACRA expects the Bank’s positions in Russia’s military-industrial complex to strengthen. In the Agency’s opinion, in the event of a systemic economic stress scenario and/or significant deterioration in the Bank’s standalone creditworthiness, the state will provide it with sufficient extraordinary support in the form of capital and/or liquidity to meet creditors’ claims.

The SCA of PSB reflects its moderately strong business profile, strong capital adequacy, low risk profile assessment, and satisfactory funding and liquidity position.

KEY ASSESSMENT FACTORS

PSB’s importance to the state is largely based on the dominating role played by the Bank in servicing Russian defense enterprises. This is evidenced by the substantial share of defense industry funding that goes through the Bank due to the consolidation of defense orders and other large government contracts.

In addition, the Bank retains important positions in the Russian banking system and therefore its default may cause a crisis of confidence in relation to the entire Russian banking sector and the country’s state-owned banks in particular; it may also trigger a systemic banking crisis and give rise to significant financial, reputational, and social risks for the state.

The Bank is wholly owned by the Russian Federation represented by the Federal Agency for State Property Management. The state exercises continuous control over the Bank’s activities, including through its supervisory board, which includes representatives of various government bodies.

The abovementioned factors combined with the propensity of the state to provide PSB with extraordinary support in the form of capital and/or liquidity, as well as previous state support in 2017–2020 and scheduled additional capitalization in late 2021 to ensure an adequate level of capital and liquidity and to compensate for outflows of client funds, also indicate the state’s very high level of support for the Bank.

The moderately strong business profile (a-) is determined primarily by the market positions of the Bank and the universal nature of its operations. The Bank’s strategy looks quite aggressive, which is dictated by its status as the key defense industry bank and its desire to retain its position in traditional banking segments. In addition, PSB is active in the M&A market. In particular, the merger with JSC ROSCOSMOSBANK was completed in 2021. JSC “Moscow Industrial bank” (ACRA rating BBB(RU), outlook Stable) should be merged with PSB within the next 1.5 years. The Agency assesses the possibility of the Bank absorbing other financial institutions in the medium term as rather high.

The assessment of the capital position has been improved due to the change in the result of calculating the averaged capital generation ratio (ACGR), which was based on data for 2019 and 2020. This indicator ranges from 50–100 bps. Acceptable capital adequacy ratios under both statutory ratios (N1.2 stood was 10.8% as of August 1, 2021) and Basel standards (Tier 1 capital exceeds 13%) allow the Bank to withstand growth in credit risk of more than 500 bps under ACRA’s stress test. At the same time, the operating efficiency of PSB is still relatively low (in 2020, the NIM (net interest margin) was about 3% and CTI (cost to income) amounted to 50%).

The risk profile assessment has been changed from critical to weak due to the exclusion of overdue loans that appeared on PSB’s balance sheet before the end of the financial recovery procedure, as well as those received from affiliated credit institutions, from the loan portfolio quality calculation (as of June 30, 2021 the portfolio amounted to 53% of assets, having increased by 33% over the past 12 months). At the same time, impairment reserves have been formed to cover losses from these loans. The loan portfolio formed by the Bank within the framework of the current business model is characterized by acceptable quality (the share of problem debt is around 7%; while problem loans are 73% covered by reserves), while the concentration on the ten largest groups of borrowers is average. The share of loans issued to companies in high-risk industries has declined (to around 61% of common capital according to the Bank), and the level of market risk amounts to less than 60% of common capital.

The satisfactory liquidity and funding position is based on the sufficient volume of highly liquid assets to cover a potential outflow of funds, and therefore, the short-term liquidity shortage indicator demonstrates a surplus in both the base case and stress scenarios. There are no significant liquidity imbalances for longer periods, while large repayments are not expected in the next 12 months.

At the same time, the Bank’s resource base has a low level of diversification and is focused on the largest lenders, as the amount of funds allocated by state-owned organizations is significant. The growth in the volume of corporate clients’ funds determines the increased concentration of this funding source in the Bank’s liabilities.

KEY ASSUMPTIONS

• Provision of non-financial state support to the Bank;

• Provision of sufficient capital and liquidity by the state if necessary;

• Maintaining the current business model within the next 12 to 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:

• Higher assessment of support due to the Bank’s increased importance to the state.

A negative rating action may be prompted by:

• Loss of shareholder or operational control over PSB by the state;

• Significant decrease in the level the Bank’s importance to the state.

RATING COMPONENTS

SCA: а-.

Adjustments: none.

Support: from the state, parity with the RF minus 1 notch.

ISSUE RATINGS

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-01 series (RU000A101U38), maturity date: June 23, 2022, issue volume: RUB 10 bln — AA+(RU).

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-03 series (RU000A102AJ1), maturity date: October 26, 2023, issue volume: RUB 15 bln — AA+(RU).

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-04 series (RU000A102RT4), maturity date: February 14, 2024, issue volume: RUB 15 bln — AA+(RU).

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-05 series (RU000A1038F9), maturity date: June 7, 2024, issue volume: RUB 15 bln — AA+(RU).

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-07 series (RU000A103PE8), maturity date: September 10, 2024, issue volume: RUB 15 bln — AA+(RU).

Credit rating rationale. The issues represent senior unsecured debt of PSB. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit ratings of the series 003Р-01, 003Р-03, 003Р-04, 003Р-05 and 003Р-07 issues are equivalent to that of PSB, i.e. AA+(RU).

regulatory disclosure

The credit ratings of Promsvyazbank PJSC and the bonds issued by Promsvyazbank PJSC (ISIN RU000A101U38, RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8) have been assigned under the national scale for the Russian Federation based on the Methodology for Analyzing Rated Entities Associated with a State or a Group, 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 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 ratings to the above issues.

The credit rating of Promsvyazbank PJSC and the credit ratings of the bonds issued by Promsvyazbank PJSC (ISIN RU000A101U38, RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8) were published by ACRA for the first time on October 30, 2018, June 25, 2020, October 29, 2020, February 17, 2021, June 11, 2021, and September 13, 2021, respectively. The credit rating of Promsvyazbank PJSC and its outlook and the credit ratings of the bonds issued by Promsvyazbank PJSC (ISIN RU000A101U38, RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8) are expected to be reviewed within one year following the publication date of this press release.

The credit ratings were assigned based on data provided by Promsvyazbank PJSC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of Promsvyazbank PJSC and the financial statements of Promsvyazbank PJSC drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit ratings are solicited, and Promsvyazbank PJSC 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.