The credit rating of AK BARS Bank (hereinafter, AK BARS Bank, or the Bank) has been upgraded based on the improvement of the funding and liquidity assessment following a change in the calculation of the Bank’s liquidity position. The Agency maintains its adequate assessments of the Bank’s business profile and capital position, as well as the weak assessment of the risk profile. The rating is supported by the high likelihood of extraordinary support from the shareholder.
AK BARS Bank is a large regional universal bank focused on SME and consumer lending services, mostly mortgage loans. The Bank is among the 20 largest banks in terms of equity and assets in Russia. The Bank operates in five of federal districts of Russia with a network of 221 offices.
KEY ASSESSMENT FACTORS
High likelihood of extraordinary support. In ACRA’s opinion, a potential default of the Bank may disrupt the bank system in the Republic of Tatarstan (RT) and push up reputational risks for the RT. Irrespective that the Bank is not a key taxpayer in the RT, ACRA assesses risks of deteriorating financial status of the Bank as significant for the local budget. The Bank perform an important transactional function for the RT budget funds and keeps on its accounts about 13% of total retail deposits in the republic. The Bank participates in a range of socially important projects (public transport payment system, electronic payments), in which it serves 100% of retail payments. On numerous occasions in previous years, the Bank received substantial volumes of financial assistance from the shareholder.
The adequate business profile (bbb) is characterized by the Bank’s stable franchise in the RT’s banking market and its role as a reference bank for the RT. The assessment is supported by the high diversification of the Bank’s operating income. The strategy of AK BARS Bank is aimed at developing its business as a universal credit institution, in both the RT and on a federal level. The Bank is currently actively increasing lending and expanding the range of other financial services offered to individuals and SMEs. This strategy will expire in 2021, so the Bank is currently developing a strategy for the forthcoming periods. The Agency does not expect any major changes in the Bank’s priorities.
Adequate assessment of loss absorption buffer. The Agency notes the continuing decrease in the Bank’s capital adequacy (N1.2 equaled 9.64% as of October 1, 2021, and Tier 1 stood at 14.5% as of September 30, 2021) and does not rule out a further moderate decline within the 12 to 18-month horizon due to growth of the Bank’s loan portfolio. However, ACRA’s assessment of the Bank’s own capacity to generate capital (averaged capital generation ratio, ACGR) has improved, averaging 124 bps for 2016–2020, after the unfavorable year of 2015 was excluded from the calculations. At the same time, the Bank’s operating efficiency has deteriorated due to the low NIM (3.2% for 2018–2020) and higher average CTI for the same three-year period (56% for 2018–2020). According to a stress test performed in line with ACRA’s methodology, the current loss absorption buffer continues to allow the Bank to withstand an increase in the cost of risk within the range of 300–500 bps in the next 12–18 months without a breach of the regulatory ratios.
The weak risk profile is determined by the quality of the Bank’s loan portfolio coupled with active growth of the volume of loans, as well as significant non-core investments on the balance sheet. As of September 30, 2021, the share of problem loans had decreased to 6.7% from 10.1% as of September 30, 2020. The current coverage ratio is 65.5%. The share of loans granted to the 10 largest groups of borrowers as of September 30, 2021 has fallen slightly since September 30, 2020 and amounted to 19.7%.
The Agency notes that the Bank is currently actively growing its retail and corporate lending profiles (growth of more than 30% in the period from October 1, 2020 to October 1, 2021), and assumes that this trajectory will continue over the 12 to 18 months horizon.
At the same time, the Bank has boosted investments in non-core assets, which currently amount to around 30% of Tier 1 capital. This growth stems from, among other things, the transfer of land plots and real estate, which previously served as loan collateral, to the balance sheet. This limits the assessment of the risk profile. Significant investments in securities on the balance sheet (around 28% of assets) may potentially be a source of increased market risks. ACRA assesses the quality of the Bank’s risk management system as satisfactory.
The funding and liquidity position has been upgraded to adequate due to the improvement of the calculated value of the long-term liquidity shortage indicator as a result of the largest creditors/depositors prolonging the terms for holding their funds with the Bank. In view of the fact that funds of companies controlled by the RT, as well as current accounts and deposits of the Bank’s shareholders, represent the bulk of the Bank’s funding, the Agency assesses the long-term liquidity shortage risk as low. According to ACRA, AK BARS Bank continues to be highly capable of withstanding cash outflows over a relatively short-term horizon.
As of September 30, 2021, legal entities and state-owned companies accounted for 71% of the funding base. ACRA notes an increased concentration on the largest lenders: the share of the 10 largest groups of lenders in the total volume of the Bank’s liabilities was almost 59% as of the end of September 2021. The Agency notes the Bank’s substantial dependence on funds held by various authorities and agencies in the Republic of Tatarstan.
KEY ASSUMPTIONS
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Maintaining the current business model aimed at increasing the share of market business;
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N1.2 higher than 9% in the next 12–18 months;
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NIM at 2.5–3.5%;
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Maintaining the current funding structure.
potential outlook or rating change factors
The Stable outlook assumes that the rating most likely will stay unchanged within the next 12–18 months.
A positive rating action may be prompted by:
- Slower growth of the loan portfolio while maintaining its quality.
A negative rating action may be prompted by:
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Declining capital adequacy ratios;
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Share of problem and potentially problem loans exceeding 10%;
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Growth of investments in non-core assets;
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Significant increase of market risk;
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Deteriorating liquidity position.
RATING COMPONENTS
Standalone creditworthiness assessment (SCA): bbb.
Adjustments: none.
Support: the Bank’s credit rating is set three notches higher than the SCA in view of state support.
ISSUE RATINGS
No outstanding issues have been rated.
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, 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 credit rating of AK BARS Bank was published by ACRA for the first time on December 11, 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 data provided by AK BARS Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of AK BARS Bank and financial statements of AK BARS Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and AK BARS Bank 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 AK BARS Bank. No conflicts of interest were discovered in the course of credit rating assignment.
