The credit rating assigned to Promsvyazbank PJSC (hereinafter, the Bank) is due to the high probability of extraordinary state support as a result of the degree of influence that the state has on the creditworthiness of the Bank. It is also due to the Bank’s systemic importance, which has increased in connection with the creation of a pillar bank for operations on state defense contracts as well as other major government contracts.
ACRA expects that in the event of a systemic economic stress scenario and/or a 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. This rating action was based on the application of Methodology for Analyzing Relationships Between Rated Entities and the State.
Key rating assessment factors
The high systemic importance of the Bank is expressed in the important positions it holds in the banking system of the Russian Federation and, as a result, in the potential consequences of its default. Such a default could lead to a crisis of confidence in the Russian banking sector in general and in particular to the state banks of the Russian Federation. It could also lead to the emergence of a systemic banking crisis as well as create significant financial, reputational, and social risks for the state. The Bank’s high systemic importance is also characterized by its capital increase expected by the end of 2018 as well as by the substantial amount of state support it received from December of 2017 through October of 2018 (RUB 330 bln in concessional loans from the Central Bank of the Russian Federation; RUB 250 bln received from sales of problem assets at nominal value to Bank AVB (hereinafter, Avtovazbank) which is now managed by the Fund of Banking Sector Consolidation Asset Management Company; RUB 250 bln in capital).
Very high state influence on the Bank’s creditworthiness. Shareholder control belongs to the Russian Federation, taking into account that the Bank’s majority shareholder is The Federal Agency for State Property Management, whose share of the authorized capital is 99.99% (the share is expected to reach 100% in November 2018). In addition, in order to ensure additional control by the state, an interauthority group of representatives of the Federal Treasury, the Ministry of Finance of the Russian Federation, and the Bank of Russia was created. This group is responsible for the development of the Bank's strategy and control over its implementation, as well as over the process of transferring defense loans from other banks to the Bank. ACRA does not expect the state to lose shareholder or operational control over the Bank due to the its status as a pillar bank for state defense orders.
ACRA attributes the Bank’s strong ties to the state to other factors: (1) the readiness of the state to provide the Bank with extraordinary support in the form of capital and/or liquidity; (2) the above-mentioned facts of state support in order to ensure an adequate level of capital and liquidity, as well as the replacement of outflow of client funds.
The main factor limiting the rating of the Bank at the level of "on par with the RF minus 3 notches" is the significant, but not yet dominant position of the Bank in the service sector of Russia’s defense system, as well as the incomplete process of transferring defense loans from other credit institutions to the Bank.
Currently, ACRA is unable to assess the Bank's standalone creditworthiness due to the incompleteness of its full-scale transformation. The approval of the new development strategy and the creation of the Bank's key governing bodies are expected before the end of 2018, while the transfer of a significant amount of defense loans to the Bank is expected by the end of 2019. In this regard, it is not yet possible to determine the Bank's business profile, conduct stress testing of capital adequacy, or assess the risk profile. ACRA will start the assignment of the standalone creditworthiness assessment (SCA) as part of the regular monitoring of the Bank’s credit rating when the necessary information is obtained.
At the same time, some SCA indicators show a significant improvement in the financial position of the Bank due to the financial support provided in the rehabilitation process. In particular, capital adequacy indicators improved (Tier-1 exceeded 18.6% as of July 1, 2018 while H1.2 was 14.1% as of October 1, 2018) and liquidity ratios are being met by significant margins. However, despite the sale of a significant amount of problem assets to Avtovazbank, the quality of the Bank’s credit profile remained low as of July 1, 2018. The share of NPL 90+ exceeded 20% of the portfolio (which is completely covered by reserves), while the concentration on the 10 largest groups of borrowers was 33% of the portfolio. Non-portfolio assets were still on the Bank’s balance
(around 15% of Tier-1).
Key assumptions
- Realization of state non-financial support;
- Sufficient volume of capital and liquidity provided by state structures;
- Approval of the new development strategy and creation of the Bank’s key governing bodies by the end of 2018.
Potential outlook or rating change factors
The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- ACRA’s improved assessment of state support in view of the Bank’s strengthened systemic importance to the Russian economy in general.
- Completion of defense loan transfers to the Bank from other credit institutions.
A negative rating action may be prompted by:
- Loss of shareholder or operational control over the Bank by the state.
- Significant decrease in the level of systemic importance of the Bank to the economy.
Rating components
SCA: unassigned.
Adjustments: state support, on par with the RF minus 3 notches.
Issue ratings
No outstanding issues have been rated.
Regulatory disclosure
The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Analyzing Relationships Between Rated Entities and the State and Key concepts used by the Analytical Credit Rating Agency within the scope of its rating activities. Some factors of standalone creditworthiness were determined using elements of the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation.
The credit rating has been assigned to Promsvyazbank PJSC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (October 26, 2018).
The assigned credit rating is based on the data provided by Promsvyazbank PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of Promsvyazbank PJSC and statements of Promsvyazbank PJSC composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and Promsvyazbank PJSC participated in its assignment.
No material discrepancies between the provided data and the data officially disclosed by Promsvyazbank PJSC in its financial statements have been discovered.
ACRA provided additional services to Promsvyazbank PJSC. No conflicts of interest were discovered in the course of credit rating assignment.
