ACRA assigns B+(RU) to PJSC Kuznetsky Bank, outlook Stable

The credit rating of PJSC Kuznetsky Bank (hereinafter, the Bank) is due to a limited business profile assessment, weak capital adequacy and risk profile, as well as adequate liquidity and funding positions.

The Bank is a universal regional bank with a basic license that ranks 274th in the Russian banking sector in capital and operates primarily in the Penza Region. The Bank’s main areas of business are financing and providing guarantees to SMEs, as well as lending to the general public (mainly consumer lending). The Bank carries out these areas of business mainly by attracting client funds. In addition, the Bank is actively developing its transaction business.

Key rating assessment factors

The Bank’s limited business profile assessment (bb) is primarily based on its limited share in the banking services market. However, due to the universal nature of its business model, ACRA assesses the Bank’s operating income diversification as consistently high. At the end of 2019, the Herfindahl-Hirschman Index stood at 0.17. The Bank’s strategy is consistent with macroeconomic trends and assumes the further development of existing business lines. The Bank’s main blockholders are M. Dralin, the Chairman of the Board of the Bank, N. Laryushkin, a member of the Board of Directors, as well as S. Yesyakov. The remaining shares are owned by minority shareholders.

The weak capital adequacy assessment is determined by the Bank’s low capital adequacy according to regulatory standards (N1.2 at 8.8% as of April 1, 2020, while averaging lower than 9% over the last 12 months) and difficulty generating internal capital (the average capital generation ratio is 19 bps for the past five years), which is mostly due to the impact of significant dividend payments. However, CTI (operating expenses to operating income) and NIM (net interest margin), calculated by ACRA based on the last three years, are at 70% and 6.9%, respectively. The Bank can withstand an increase in the cost of risk in the range of 300-500 bps.

The weak risk profile assessment is primarily based on the satisfactory quality of the loan portfolio (53% of assets as of December 31, 2019). The share of problem and potentially problem debt in the portfolio was 14.6% (including NPL90+ loans at 9.1%, forced restructured loans at 2.9%, and potentially problem loans, according to ACRA, at 2.6%) with moderate concentration on the ten largest groups of borrowers (25% of the portfolio). The concentration of the portfolio on high-risk sectors (1.2x fixed capital) is high, but part of it falls on less risky infrastructure construction, which to some extent reduces the Bank’s exposure to the risk of deterioration in the construction industry and the real estate sector. The share of loans to related parties is low at 23% of fixed capital. The credit quality of the securities portfolio (15% of assets), which consists only of OFZs and Bank of Russia bonds, is high, and the market risks for them are acceptable. Non-core assets on the Bank’s balance sheet, which amount to 27% of fixed capital and are represented by investment real estate received as compensation, negatively affect the risk profile assessment. The quality of the Bank’s risk management system is satisfactory.

The Bank’s adequate liquidity position is based on the ability to withstand an outflow of client funds under both ACRA’s base case (short-term liquidity surplus of RUB 0.4 bln) and stress scenarios (shortage equal to 10% of liabilities). The long-term liquidity shortage indicator stood at 72% as of December 31, 2019, due to a significant share (30%) of customer funds on demand in the Bank’s resource base.

Adequate funding profile. The high concentration of the resource base on the largest source (consumer funds account for about 65% of liabilities) is offset by the Bank’s low dependence on the largest groups of creditors. The largest group accounted for less than 2% of liabilities, while the ten largest accounted for less than 10%. However, the share of funds from related parties (including subordinated deposits) is low, and the regulator's funds, which accounted for 5.5% of liabilities at the end of 2019, were raised within the framework of targeted financing.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Maintaining NIM around 6%;
  • Maintaining acceptable capital adequacy (N1.2) within the 12 to 18-month horizon. 

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:

  • Increased capital adequacy with a significant increase in capital generation;
  • Significant reduction in problem loans while maintaining moderate portfolio concentration on the largest groups of borrowers;
  • Significant reduction in non-core assets.
  • A negative rating action may be prompted by:
  • Reduction in capital adequacy ratios and/or deterioration in operating efficiency;
  • Increased problem debt in the portfolio and/or increased concentration on the largest groups of borrowers, as well as an increase in loans to companies in high-risk industries or a significant increase in unsecured loans in the portfolio;
  • Deterioration in liquidity and/or funding positions. 

Rating components

SCA: b+.

Adjustments: none.

Support: none.

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 and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

A credit rating has been assigned to PJSC Kuznetsky Bank for the first time. 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 the data provided by PJSC Kuznetsky Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the financial statements of PJSC Kuznetsky Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and PJSC Kuznetsky Bank participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by PJSC Kuznetsky Bank in its financial statements have been discovered.

ACRA provided no additional services to  PJSC Kuznetsky Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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