Changing the status from “Rating under revision: negative” to “Rating under revision: developing” to the credit rating of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) (hereinafter, the Bank) and concurrently confirming the credit rating at BBB-(RU) reflect: (1) ACRA’s opinion of decreased short-term risks for the Bank’s financial stability following a substantial government support of the Bank by the Central Bank of the Russian Federation; (2) potential change of the standalone creditworthiness assessment (SCA) in the short term.

Key rating assessment factors

ACRA’s decision is driven by the following factors:

  • Appointment of a temporary administration to the Bank by the Central Bank of the Russian Federation on August 29, 2017, and Bank of Russia’s announcement that it assumes the functions of a main investor and, in the short term, of the majority shareholder of the Bank (with a stake of at least 75 per cent of shares);
  • No moratorium on satisfying creditors’ claims and no bail-in;
  • Statements by representatives of the Bank of Russia on high probability of the Bank’s capital adequacy decline to minimum values and on the need to inject additional capital by the Bank of Russia in the short term.

Confirmation of the credit rating reflects ACRA’s opinion on mitigation of short-term risks of a substantial deterioration of the Bank’s financial position owing to the Bank of Russia undertaking to provide financial support to the Bank and to guarantee continuity of its operation.

Considering the above factors, ACRA classifies the Bank as a rated entity with state influence and assesses state’s influence on the Bank as very strong and its systemic importance as medium. Therefore, ACRA adjusts the Bank’s SCA three notches up. ACRA discontinues adjustment of two notches up to the Bank’s SCA as the Bank’s systemic importance is assessed as moderate.

Further dynamics of the rating is expected to be driven by changes in the Bank’s SCA, while any changes in our assessment of government support are less likely in the next 12-18 months.

Taking into account the recently occurred significant changes in standalone creditworthiness of the Bank, ACRA downgrades SCA by three notches based on the below detailed assessments of the key risk factors.

  • Critical capital adequacy assessment reflects ACRA’s expectations regarding the need to create substantial additional provisions covering problem assets of the Bank as well as to make other negative capital adjustments taking into consideration the Bank’s participation in asset acquisition by Otkritie Holding, and to support it financially. In the meantime, the Agency discontinues the two-notch negative adjustment applied earlier in order to highlight potential decline of the Bank’s capital adequacy due to ACRA’s weak assessment of Otkritie Holding creditworthiness.
  • Adequate assessment of funding and liquidity reflects intentions of the Bank of Russia to provide necessary financial resources to ensure continuity of the Bank’s business and performance of its obligations to the creditors. In addition, the assessment takes into account substantial amount of funds already provided by the Bank of Russia to support the Bank’s resource base.

The “Rating under revision: developing” status reflects the need to obtain material information regarding the Bank’s financial standing as well as further actions by the temporary administration and by the Bank of Russia in order to update standalone creditworthiness assessment and the final rating. ACRA also draws attention to additional uncertainty as to the Bank’s future business model following consolidation by «Bank Otkritie Financial Corporation» (PJSC) of such assets as Public Joint-stock Company Rosgosstrakh Insurance Company, Public Joint-stock Company Rosgosstrakh Bank, JSC NPF LUKOIL-Garant, Joint-stock Company NPF of Electric Power Industry, and Joint-stock Company NPF RGS (the list is given according to the press release by the Bank of Russia).

ACRA notes increased probability of a partial or full write-off (conversion) of the Bank’s subordinated debt if the Bank’s capital adequacy ratio drops below the levels that result in activation of triggers and other covenants. Taking into account the statements made by the Bank of Russia, ACRA considers the subordinated debt situation separately from other types of the Bank’s commitments to the creditors.

The Agency continues monitoring the current situation as well as measures to restore the Bank’s financial stability and plans to consider the matter of resolving the status of the credit rating within the next 90 days.

Key assumptions

  • No priority for payments under specific categories of unsecured commitments;
  • Provision of sufficient liquidity and funding by the Bank of Russia.

Potential outlook or rating change factors

A positive rating action may be prompted by:

  • Capital injection by the Bank of Russia and stabilization of capital adequacy ratio at a level compliant with regulatory requirements;
  • Significant improvement in the quality of assets, in particular, with respect to corporate lending;
  • In the long term, development of an updated business model and strategy of the Bank, and management quality improvement.

A negative rating action may be prompted by:

  • Decisions made by the Bank’s temporary administration to prioritize specific claims of creditors;
  • Further decline of standalone creditworthiness for the lack of any compensatory government support measures.

Removal of the “Rating under revision” status may be prompted by:

  • Provision of material information regarding the financial standing of the Bank and companies acquired by the group in order to update standalone creditworthiness assessment and the final rating.

Rating components

Standalone creditworthiness assessment (SCA): bb-.

Adjustments: state support: +3 notches.

Regulatory disclosure

The credit rating and its status have 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 Methodology for Analyzing Relationships Between the Rated Entity and the State, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) was published on July 3, 2017 for the first time. The credit rating is expected to be revised within 90 days following the rating action date (September 4, 2017).

The assigned credit rating and its status are based on the data provided by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company), information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) and statements of «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in its financial statements have been discovered.

ACRA provided an additional service to «Bank Otkritie Financial Corporation» (Public Joint-Stock Company) in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.

Disclosure of deviations from approved methodologies. (1) The funding and liquidity factor was assessed based on the official statement of the Bank of Russia regarding guarantees that the Bank will continue its operation, and funding and liquidity will be provided to the Bank as needed. (2) High market risk is mitigated by a significant share of high-quality securities in the securities portfolio; hence, a one-notch positive adjustment pertaining to market risk was applied.

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Analysts

Valeriy Piven
Managing Director, Head of Financial Institutions Ratings Group
+7 (495) 139 04 93
Suren Asaturov
Director, Financial Institutions Ratings Group
+7 (495) 139 04 80, ext. 130
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