Training on sovereign risk credit analysis, October 24

ACRA affirms B-(RU) to «BaikalInvestBank» JSC, outlook Developing

The credit rating of «BaikalInvestBank» JSC (hereinafter, BaikalInvestBank, or the Bank) has been affirmed at B-(RU) due to a weak business profile, adequate capital adequacy, adequate liquidity, a neutral risk profile assessment, and satisfactory funding structure. The Developing outlook (the rating previously held the status of “Rating under revision: developing”) is due to the fact that the merger that started at the end of 2018 with JSC «BANK REALIST» (hereinafter, JSC «BANK REALIST»; ACRA rating B(RU), outlook Developing) is still not complete and ACRA is currently unable to assess the timeframe for its completion.

BaikalInvestBank is a small credit institution operating primarily in the Irkutsk Region and Moscow. The Bank’s operations include corporate loans, loans to purchase construction machinery, bank guarantees, transactions in gold bullions, and foreign exchange transactions. As of July 1, 2019, BaikalInvestBank ranked 150th in capital and 175th in assets in the Russian banking system. The Bank’s key shareholders are Oleg Karchev, Vladislav Mangutov, and Alexey Abramov, who also co-own JSC «BANK REALIST» and the MERLION group of companies.

Key rating assessment factors

The business profile assessment reflects the Bank’s weak franchise in the banking market as well as ACRA’s negative opinion regarding the business reputation of one of the Bank’s beneficiaries (a former shareholder of JSC “ROST BANK” as well as a number of affiliated banks with respect to which the Bank of Russia decided to activate financial rehabilitation procedures in November 2014). BaikalInvestBank’s share in the Russian banking market is insignificant. However, it holds an adequate position in the regional market and a sustainable base of borrowers from among gold mining companies. ACRA notes the high diversification of the Bank’s operating income (the Herfindahl-Hirschman Index stood at 0.22 for 2018). However, this value could decrease as a result of a change in the criteria for banks accessing the guarantees market starting on January 1, 2020. In ACRA’s opinion, this could lead to a decrease in commission income from issuing guarantees.

Adequate loss absorption cushion. As of July 1, 2019, the Bank’s capital adequacy ratios were high (N1.1 at 10.3%, N1.2 at 10.3%, N1.0 at 10.9%). The current level of loss absorption allows the Bank to withstand an increase in the cost of risk of more than 500 bps without violating mandatory standards. ACRA assesses the Bank’s ability to generate capital as weak; the averaged capital generation ratio, ACGR, was around zero for 2014-2018.

Neutral risk profile assessment. According to IFRS statements, problem and uncollectable stage 3 loans amounted to 14.7% for 2018, of which 3.6% were NPL90+. The concentration on the 10 largest groups of borrowers is acceptable at 31%. The quality of core risk management is satisfactory compared to competitor banks. The quality of the top principals under guarantees issued is assessed as adequate.

The Bank’s liquidity and funding structure are subject to significant fluctuations because of the seasonality of its main clients’ operations (gold mining companies). ACRA maintains its assessment of the Bank’s liquidity as adequate, as the Bank satisfies regulatory requirements by a significant margin (N2 at 108%, N3 at 101% as of July 1, 2019). ACRA also maintains its assessment of the Bank’s funding structure as satisfactory considering the concentration on funds from the largest creditors (largest creditor at 4.97%, top 10 at 25.09% as of July 1, 2019).

Key assumptions

  • Maintaining the current business model;
  • N1.1 above 9%, N1.2 above 9% within the 12 to 18-month horizon;
  • Cost of risk no higher than 3.5%;
  • NIM no lower than 5%;
  • Maintaining the current funding structure.

Potential outlook or rating change factors

The Developing outlook assumes with equal probability either an upgrade or a downgrade of the rating within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Decrease in problem and uncollectable loans;
  • Strengthened competitive positions in key segments;
  • Decreased concentration of funding sources.

A negative rating action may be prompted by:

  • Decrease in capital adequacy;
  • Decrease in loan portfolio quality;
  • Decrease in liquidity.

Rating components

Standalone creditworthiness assessment (SCA): b-.

Adjustments: none.

Support: none.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating was 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 and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to «BaikalInvestBank» JSC was published by ACRA for the first time on November 30, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The assigned credit rating is based on the data provided by «BaikalInvestBank» JSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of «BaikalInvestBank» JSC and statements of «BaikalInvestBank» JSC composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and «BaikalInvestBank» JSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by «BaikalInvestBank» JSC in its financial statements have been discovered.

ACRA provided no additional services to «BaikalInvestBank» JSC. No conflicts of interest were discovered in the course of credit rating assignment.

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