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

The credit rating of Promsvyazbank PJSC (hereinafter, PSB, or the Bank) is based on its high systemic importance, which is evidenced by PSB’s status as Russia’s key defense industry bank, as well as the very strong influence of the state on its creditworthiness.

Amid the strengthening of the Bank’s position in the defense industry (from mid-2019 to 2022, the share of state defense contracts serviced by the Bank rose from 30% to more than 70%), the state regularly provides capital injections to the Bank, ensuring its ability to increase lending to this area, as well the non-defense corporate, SME, and retail segments as per PSB’s current development strategy as a universal bank. From 2019 to September 2022, total provision of additional capital to PSB by the state (to develop the defense industry and for other purposes) and from other banks amounted to around RUB 100 bln. By the end of 2022, the Bank also expects to receive additional capitalization from the state, both in the form of direct capital injections for the development of its key segment, and as part of the defense industry loan cession program conducted in coordination with other banks.

PSB continues to record significant growth in terms of key indicators of activity, in particular, assets, equity and client account balances increased considerably in the period from July 1, 2021 to July 1, 2022. The growth of asset-related transactions is occurring in parallel with the increase in the volume of funds of defense companies placed in the Bank, as well as other areas of business, including SMEs and retail.

ACRA performed the rating analysis using its Methodology for Analyzing Rated Entities Associated with a State or a Group. Moreover, the Agency 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 standalone creditworthiness assessment (SCA) of PSB reflects its moderately strong business profile, strong capital adequacy, moderately 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 military-industrial 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 abovementioned factors combined with the propensity of the shareholder to provide PSB with extraordinary support in the form of capital and/or liquidity, as well as previous support in 2017–2022 to ensure an adequate level of capital and liquidity and to compensate for outflows of client funds, which happened occasionally in the aforementioned period, also indicate the shareholder’s very high level of support for the Bank. At the same time, the shareholder continuously monitors the Bank’s activities.

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, and another Russian bank, JSC “Moscow Industrial bank” (ACRA rating BBB(RU), outlook Stable), should be merged with PSB within the next year. The Agency assesses the possibility of the Bank absorbing other financial institutions in the medium term as rather high.

The strong capital position stems from the acceptable capital adequacy ratios under both statutory ratios (N1.2 had declined slightly as of September 1, 2022 compared to last year) and Basel standards that allow the Bank to withstand growth in credit risk of more than 500 bps under ACRA’s stress test.

The calculation of the averaged capital generation ratio (ACGR) was based on data for 2019–2021. This indicator ranges from 50–100 bps.  At the same time, PSB’s operational efficiency continues to be moderately low.

The weak risk profile assessment is based on the acceptable quality of the loan portfolio formed by the Bank under the current business model (the share of problem debt has declined slightly compared to last year, but continues to be adequately covered by reserves), while the concentration on the ten largest groups of borrowers is medium. The analysis of the loan portfolio excludes overdue loans that appeared on PSB’s balance sheet before the end of the financial recovery procedure, as well as those received from merged credit institutions. At the same time, impairment reserves have been formed to cover losses from these loans. The share of loans issued to companies in high-risk industries and the level of market risk are acceptable.

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 over longer periods.

At the same time, the Bank’s resource base is characterized by an increasing concentration on corporate clients’ funds in liabilities. The level of concentration on largest lenders is still elevated due to the significant amount of funds from state-owned organizations, but it has decreased slightly compared to the previous year.

key assumptions

• Provision of sufficient capital and liquidity by the shareholder and related entities 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 highly 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 shareholder.

A negative rating action may be prompted by:

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

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

rating components

SCA: а-.

Adjustments: none.

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

issue ratings

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).

Exchange-traded interest-bearing uncertificated non-convertible bond subject to centralized title registration issued by Promsvyazbank PJSC, 003P-08 series (RU000A1042P0), maturity date: November 17, 2023, issue volume: RUB 5 bln — AA+(RU).

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-03, 003Р-04, 003Р-05, 003Р-07, and 003Р-08 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 RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8, RU000A1042P0) 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, 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 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 RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8, RU000A1042P0) were published by ACRA for the first time on October 30, 2018, October 29, 2020, February 17, 2021, June 11, 2021, September 13, 2021, and November 19, 2021, respectively. The credit rating of Promsvyazbank PJSC and its outlook and the credit ratings of the bonds issued by Promsvyazbank PJSC (ISIN RU000A102AJ1, RU000A102RT4, RU000A1038F9, RU000A103PE8, RU000A1042P0) 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 financial 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 were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.