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.
ACRA has lowered the standalone creditworthiness assessment (SCA) of UniCredit Bank by a single notch to aa due to the reduction in the scale of its business since February 2022. Geopolitical pressure continues to limit the Bank’s business opportunities. Therefore, the SCA is determined by the Bank’s still relatively strong current market position, strong capitalization and profitability, as well as an adequate risk profile and funding and liquidity position. The final rating remains unchanged due to 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 occupies significant positions 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 has declined by a single notch to a. Amid the geopolitical tensions of the past two years, as a subsidiary of a global banking group, UniCredit Bank has been forced to adhere to the Group’s policy of reducing its presence in the Russian Federation. This has had a considerable impact on UniCredit Bank’s lending activity, causing a significant contraction of its portfolio, and continues to put pressure on the Bank’s business opportunities. Further development is uncertain and the Group has publicly announced multiple times that it is considering different scenarios for exiting the Russian market. Consequently, the Agency cannot exclude the possibility of changes in the strategy and ownership structure of the Bank, as well as the format and scale of the Group’s presence in the Russian market over the next 12 months.
The business profile assessment is supported at its current relatively strong level by improved financial results over the past two years on the back of the Bank’s cheap funding base, income from foreign currency transactions and revaluation, as well as lower allocations to reserves due to a shrinking loan portfolio. The continued ability to conduct international settlements is an advantage, which distinguishes the Bank from its large competitors, and also has a positive impact on the Bank’s activities. However, growing geopolitical tensions and the attention of global regulators may lead to a reduction in activity in this area.
Other factors that support the business include a globally recognized brand and many years of experience, which continue to have a positive impact on customer confidence. The Agency’s opinion on the strong business profile assessment is backed 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.
The strong capital adequacy reflects excessively high current capital adequacy metrics (N1.2 was 48% as of the start of April 2024) amid a declining loan portfolio and a proven ability to generate profits. The results of 2022 and 2023 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.
The negative impact on UniCredit Bank’s capitalization and liquidity from the court’s decision on the seizure of assets under the claim in the amount of EUR 463 mln is manageable, given the strong financial metrics of the Bank recorded over the last two years against the background of business contraction.
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. In its forecasts, ACRA takes into account dividend payments in the amount of 50% of profits.
The adequate risk profile assessment of UniCredit Bank is due to a high-quality risk management system and the transforming structure of the balance sheet, on which the share of liquid and low-risk assets continues to grow.
The amount of potential non-performing loans that has grown since 2022 constrains the assessment. This is associated with the inclusion in the non-performing portfolio of a client who 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 complicate credit risk management. On the other hand, the presence of these 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 support the Bank’s credit rating.
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 Bank of Russia continues to include UniCredit Bank in its list of systemically important credit institutions. The Agency’s opinion on the level of systemic importance is expressed in the addition of two notches to the SCA.
In ACRA’s opinion, the degree of support from the Group has not changed over the past year. 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 also 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.
KEY ASSUMPTIONS
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Maintaining the current business model over the next 12 months;
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Continued status as a systemically important financial institution;
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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:
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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;
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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;
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Deterioration of the business profile assessment due to the Group’s reduced interest in developing in Russia.
RATING COMPONENTS
SCA: aa.
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.
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 creditworthiness of the SE was determined based on the principles of the Methodology for Credit Rating Assignment to Banks and Banking Groups under the International Scale, Methodology for Credit Rating Assignment to Sovereign Entities under the International Scale, and the Methodology for Mapping Credit Ratings Assigned under ACRA’s International Scale to Credit Ratings Assigned under ACRA’s National Scales.
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. 6406-U dated April 10, 2023. 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.
