The credit rating of LLC CBED «THE BANK OF KAZAN» (hereinafter, the Bank) is based on the satisfactory business profile, adequate capital adequacy, weak risk profile, and adequate assessment of funding and liquidity.
The Bank is a small credit institution operating primarily in the Republic of Tatarstan (ACRA rating: AAA(RU), outlook Stable, hereinafter, Tatarstan). As of February 1, 2022, the Bank ranked 162nd in equity and 165th in assets in the Russian banking sector.
Key assessment factors
The satisfactory business profile assessment (bb+) stems from the small market share held by the Bank in the Russian banking sector in general, and in Tatarstan in particular, as well as the still quite concentrated nature of its business (as of February 1, 2022, the 20 largest principals and 20 largest borrowers accounted for about 46% and 31% of the respective portfolios). At the same time, the Bank has been decreasing the granularity of its loan portfolio, shifting the focus in favor of smaller enterprises and portfolio loans. Besides corporate loans (over 75% of the loan book), guarantee issuance continues to be the Bank’s major business line, which contributes to the diversification of its operations. ACRA also notes the improved geographic diversification of the guarantee portfolio towards a lower share of the key region (Tatarstan, about 44% of issued guarantees) and a higher share of express guarantees mostly issued in Moscow and Saint Petersburg.
According to its business plan announced earlier, the Bank of Kazan resumed its active lending operations last year interrupted in 2020 in the harsh external environment. The loan portfolio has grown in both corporate and retail lending, including the segment of consumer loans to borrowers from among employees of state and municipal institutions and major enterprises of Tatarstan. At the same time, the Bank does not forecast any further increase in its loan and guarantee portfolios in the current volatile economic environment.
Adequate capital adequacy assessment. As of February 1, 2022, the Bank's regulatory capital adequacy ratio N1.2 was comfortably at 11.9% (11.8% as of February 1, 2021). However, over the past five years, the Bank's average capital generation ratio (ACGR) has shown a progressive decline and, taking into account the dividends for 2021, it equals 36 bps. Although the Bank's operations demonstrate a relatively low profitability, ACRA believes that the Bank is able to withstand an over 500 bps increase in the cost of risk under the stress scenario relative to the base case scenario without violating the N1.2 ratio.
At the same time, low operating efficiency continues to put pressure on the capital adequacy assessment: CTI averaged over the last three full years has come close to the 75% threshold. The Agency forecasts a further deterioration of the Bank's operating efficiency in the next 12–18 months against the backdrop of an unfavorable operating environment, which may negatively affect the capital adequacy assessment.
The weak risk profile reflects the presence of non-performing and potentially non-performing loans in the Bank's loan portfolio, which, according to the Agency's estimates, make up 15.3% of the portfolio. At the same time, the share of IFRS 9 Stage 3 loans decreased from 14.1% to 12.9% of the portfolio over the past 12 months on the back of, among other reasons, an increase in the loan portfolio. An assessment-positive factor is a decrease in the concentration on the ten largest groups of borrowers from 26.5% of the portfolio as of February 1, 2021 to 22.4% as of February 1, 2022.
The Agency notes that the share of unsecured loans has increased to 57.4% of the portfolio as of February 1, 2022, while a threshold value (as per ACRA's methodology) is 60%. Concentration on high-risk industries is still in the focus of ACRA’s attention: for example, as of February 1, 2022, the share of the Bank’s loans granted to construction companies amounted to 48% of Tier 1 equity. In addition, a significant share of companies acting as principals under guarantees belongs to construction and trade sectors (about 17% and 26% of the guarantee portfolio). In the Agency's opinion, these sectors may be the most vulnerable to a difficult economic environment.
Adequate funding and liquidity position. The Bank has maintained a sufficient buffer of liquid assets, while its funding comes mainly from deposits (dominated by retail customers), and the Agency assesses it as relatively stable. As of February 1, 2022, the short-term liquidity shortage indicator was positive in both the base case and the stress scenarios of ACRA; the long-term liquidity shortage indicator was 91%.
The Bank has maintained low its dependence on the funds of the largest creditors / depositors: the share of funds of a single largest creditor / depositor is less than 5%, and the share of the ten largest creditors / depositors is less than 25%.
Adhering to the current business model over the next 12 to 18 months;
Maintaining N1.2 above 9%;
The Bank’s capacity to withstand an increase in the cost of risk of no lower than 500 bps above the base case scenario without violating the N1.2 ratio;
Maintaining three-year averaged CTI at no higher than 75%.
Potential outlook or rating change factors
The assumes that the rating will highly likely stay unchanged within the 12-month horizon.
A positive rating action may be prompted by:
Sustained significant decrease in the volume of non-performing loans;
Significant and sustained growth in capital and profitability metrics.
A negative rating action may be prompted by:
Consistent growth in three-year averaged CTI to over 75%;
Common equity adequacy ratio declining below 9% along with a decline in the capital generation capacity;
Sustained growth of the share of unsecured loans to more than 60% of the loan portfolio.
Standalone Creditworthiness Assessment (SCA): bb+.
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 LLC CBED «THE BANK OF KAZAN» was published by ACRA for the first time on May 11, 2017. 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 the data provided by LLC CBED «THE BANK OF KAZAN», information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of LLC CBED «THE BANK OF KAZAN» and the statements of LLC CBED «THE BANK OF KAZAN» drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and LLC CBED «THE BANK OF KAZAN» 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 no ancillary services to LLC CBED «THE BANK OF KAZAN». No conflicts of interest were identified in the course of credit rating assignment.