The credit rating of AO UniCredit Bank (hereinafter, UniCredit Bank, or the Bank) has been affirmed to reflect ACRA’s expectations that in the next 12 months the Bank will maintain a sustainable level of standalone creditworthiness and the status of a systemically important institution, despite the pressure of geopolitical risks and the uncertainty of the operating environment.
UniCredit Bank’s high standalone creditworthiness assessment (SCA) is determined by strong market positions, a significant loss absorption buffer, adequate risk profile, and an adequate funding and liquidity position. The final rating is supported by ACRA’s opinion on the moderate systemic importance of UniCredit Bank to the Russian financial sector, which is expressed in the addition of two notches to the SCA.
AO UniCredit Bank is a systemically important institution and subsidiary of a global financial group (hereinafter, the Group, the Supporting Entity, or the SE). The Bank is among the leaders in terms of assets and capital in the Russian banking sector. The Bank operates a wide branch network spanning almost all of Russia’s federal districts, with a focus on Moscow.
KEY ASSESSMENT FACTORS
The business profile assessment is strong (a+), despite the decline in business due to the changed external environment last year. UniCredit Bank is well represented in the banking services market, being a universal credit institution with a wide range of activities. The globally recognized brand and many years of experience have a positive impact on customer confidence, supporting the Bank’s strong competitive positions. Historically, the strategy has been focused on large businesses: the Bank’s borrowers are leaders in their industries. The Agency’s opinion on the strong business profile assessment is supported by high standards of corporate governance, as well as risk management and control procedures implemented and cultivated by the Russian subsidiary, taking into account the Group’s global experience.
At the same time, ACRA assumes that the current geopolitical tensions and restrictions imposed on operations in Russia may significantly impair UniCredit Bank’s business development prospects. The Bank’s loan portfolio significantly narrowed over the past year and is likely to continue to decline in the next 12 months. This approach is due to the unwillingness to expose the Group to additional sanctions, regulatory and reputational risks. Therefore, the Agency does not exclude an alternative scenario of changes to the Bank’s strategy and ownership structure, and the format and volume of the Group’s presence in the Russian market in the next 12 months.
The situation is mitigated by the continued high demand for the services of UniCredit Bank, observed by ACRA, which, due to the events of last year, remained one of the few large banks that retained the ability to conduct international settlement transactions.
The strong capital adequacy reflects excessively high current capital adequacy metrics amid a declining balance sheet and a proven ability to generate profits over time. The results of 2022 in accordance with the local adjusted IFRS reporting significantly exceeded the figures of previous years due to net interest income (the values were supported by a temporarily high key rate and changes in the resource base, in which current accounts free of charge for the Bank and equity increased their shares) and revenues from operations with foreign currency.
ACRA expects UniCredit Bank’s capitalization to continue to strengthen over the next 12 months due to the management’s prudent decision to suspend active operations until some clarification of the external environment, as well as thanks to the inability to pay dividends outside the Russian Federation in the current conditions.
The adequate risk profile assessment of UniCredit Bank is due to a high-quality risk management system, which is characterized by transparency and independence in making intra-bank decisions, as well as regular improvement of risk methodologies and stress tests of capital adequacy, liquidity and market risk indicators.
At the same time, the share of potential non-performing loans has grown significantly over the past year, which is associated the inclusion in the non-performing portfolio of a client that faced difficulties in making foreign currency payments on syndicated loans due to the current geopolitical restrictions.
In addition, the Agency notes that significant amounts of exposures to related non-residents (the servicing of which may be complicated by geopolitical tensions, in particular, current and possible future restrictions on the movement of capital) may also make it difficult for the Bank to overcome the current crisis. On the other hand, the presence of such foreign currency assets makes it possible to more efficiently manage the foreign exchange position in order to balance a significant part of liabilities denominated in foreign currency.
Adequate funding and liquidity position. Thanks to its strong market positions and brand, the Bank has a comfortable volume of liquid and highly liquid assets, manages liquidity prudently, and has a stable and relatively inexpensive resource base. Along with the growing share of capital on the Bank’s balance sheet, these factors will continue to counterbalance risks associated with shortening maturities of liabilities on the back of significant growth of the share of current accounts.
Importance to the financial system. In ACRA’s opinion, over the next 12 months, UniCredit Bank will maintain its moderate systemic importance due to the still significant amount of funds held by customers with the Bank, the overall scale of its business, and the presence of offices in most regions of the Russian Federation. ACRA also notes the growing importance of UniCredit Bank as one of the few channels still available to service international transactions. The Agency’s opinion on the level of systemic importance is expressed in the addition of two notches to the SCA.
The degree of support from the Group has not changed over the past year, according to ACRA’s view. The Agency understands that the SE’s interest in maintaining its presence in the Russian market has decreased after the sharp escalation of economic, political, sanctions, and regulatory risks in Q1 2022. ACRA also believes that although the negative financial consequences of the Group’s exit from the Russian market would be notable, they would not lead to a sustained significant deterioration in the Group’s financial standing. Regardless of further steps taken by the Group in relation to its Russian business, the Agency notes that strong reputational ties with the Supporting Entity will remain as long as a single brand is maintained.
In addition, ACRA emphasizes that the current support assessment continues to take into account the different jurisdictions of presence of the Bank and the SE, which makes the possibility of providing support dependent on the freedom of capital movement between the countries.
Maintaining the current business model over the next 12 months;
Continued status as a systemically important financial institution;
Continued reputational risks for the Group in case of disruptions to the Bank’s operations.
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 negative rating action may be prompted by:
Reduced possibility of state support due to the Bank losing its systemic importance/lower systemic importance, coupled with signs of further decline in the Group’s propensity to provide support;
Substantial decline in the Bank’s standalone creditworthiness, for example, due to significant credit losses on receivables from non-residents associated with current or future possible difficulties in conducting cross-border transactions;
Deterioration of the business profile assessment due to the Group’s reduced interest in developing in Russia.
Individual adjustments: none.
Systemic importance: SCA +2 notches.
Support: ACRA assumes that the SE will be able to provide the Bank with extraordinary support, including capital and liquidity. As the final rating, taking into account the systemic importance, is AAA(RU), the potential impact of group support on the rating has not been determined.
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, 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 AO UniCredit Bank was published by ACRA for the first time on June 27, 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 data provided by AO UniCredit Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated financial statements of UniCredit Bank Group and the financial statements of AO UniCredit Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited and AO UniCredit Bank participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided additional services to AO UniCredit Bank. No conflicts of interest were discovered in the course of credit rating assignment.