ACRA affirms A(RU) to Joint-Stock Commercial Bank "NOVIKOMBANK", outlook Stable

The credit rating assigned to Joint-Stock Commercial Bank "NOVIKOMBANK" (hereinafter, the Bank) is based on the Bank’s stable business profile, adequate funding and liquidity positions, and adequate level of capital adequacy. The likelihood is high that, if necessary, the Bank will be supported by its parent entity, which boasts high creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is limited by the high concentration of the loan portfolio on the largest borrowers and related parties, including companies of Rostec State Corporation (AAA(RU), outlook Stable (hereinafter, Rostec or the parent entity).

The Bank is owned and fully controlled by Rostec, which comprises more than 800 enterprises in various sectors of the economy, including high-tech manufacturers. The Bank is a key element of the financial center of Rostec, providing comprehensive banking services and loans to Rostec companies and their employees.

Key rating assessment factors

The Bank’s business profile assessment (bbb) reflects its rather high positions in the Russian banking system. As of September 1, 2020, the Bank ranked 24th in capital and 20th in assets among Russian banks. The Bank is characterized by its high-quality brand, as well as satisfactory corporate governance system and strategic planning. The Bank’s regional presence is determined by the need to service companies of the parent entity.

The Bank’s business profile assessment is limited due to the very low diversification of its operating income (as of July 1, 2020, the Herfindahl–Hirschman index was 0.46), which is related to the specifics of the Bank’s market niche and its focus on lending to and servicing Rostec companies. The long-term strategy of the Bank assumes further strengthening its positions as a universal credit institution deeply integrated into the financial structure of Rostec. This should help the volume of the Bank’s assets to continue actively growing as well as help sustained growth in operating income.

Adequate capital adequacy assessment. Regulatory capital adequacy ratios are moderate (as of September 1, 2020, N1.2 was 8.9%), which indicates a sufficient loss absorption buffer. In 2020, capital adequacy ratios N1.2 and N1.0 (equity adequacy) were supported by additional capitalization in the form of an indefinite subordinated loan received by the Bank for RUB 5 bln. The ACRA’s stress test indicates that the Bank is able to withstand a rise in the cost of credit risk by more than 500 bps without violating the minimum prudential standards.

The net interest margin (NIM) demonstrated by the Bank in 2017–2019 is comparable with that of peer financial institutions (3.5%). In addition, the average ratio of operating costs to income (CTI) amounted to 31% for the same period, which indicates the efficiency of the Bank’s core operating activities.

The averaged capital generation ratio, calculated for the past five years, is negative. This is due to losses from previous periods as a result of forming reserves for problem loans.

The risk profile assessment is low based on the combination of satisfactory risk management quality and the high concentration of the Bank’s loan portfolio. ACRA estimates that the overall volume of problem loans has fallen slightly and now amounts to 6.8% of the portfolio, while reserves cover 87.9% of this debt.

Loans granted to the Bank’s top ten borrowers account for 33% of the total loan portfolio. The loan portfolio of the Bank is also characterized by a high concentration on companies within the Rostec group. According to IFRS financial statements, loans issued to parties related to the Bank’s shareholder account for more than 600% of Tier 1 capital. ACRA also takes into account that banking services and financing provided by the Bank to Rostec companies are a part of its functionality within the corporation. The risk profile assessment is limited by the high growth rate of the loan portfolio.

Currently, the Bank’s securities portfolio is almost non-existent, and counterparties on interbank loans are generally of good quality. Market and operational risks are at acceptable levels.

Adequate funding and liquidity assessment. In mid-2020, the short-term liquidity shortage indicator was positive in the base case scenario; the stress scenario showed a liquidity excess of 2% of liabilities. The long-term liquidity position of the Bank is assessed as strong, with the long-term liquidity shortage indicator standing at 94% as of July 1, 2020.

Pressure on the funding assessment is exerted by the concentration of the Bank’s resource base on corporate funds. As of July 1, 2020, the share of funds from the largest group of creditors amounted to about 78% of liabilities, while the share of funds from the top ten groups of creditors was 85%. The main source of funds includes corporate deposits and current accounts (91% of liabilities as of July 1, 2020). However, ACRA takes into account the stability of funds remaining on the accounts of Rostec group companies, which make up the dominant part of the attracted corporate funding. ACRA does not expect any significant changes in the funding structure within the 12 to 18-month horizon. High concentration on corporate funds does not affect the funding assessment, since such risks have already been taken into account in assessing the degree of concentration on funds from the largest creditors.

The rating takes into account the high likelihood of support from the parent entity. The Bank’s strategy assumes deepening its integration into the financial structure of the Rostec group in order to optimize financing and provide banking services to the group’s companies and related structures. The Bank’s importance to the parent entity is evidenced by: (1) recapitalizations of the Bank carried out by the parent entity in recent years; (2) current support provided to the Bank via placement of funds held by Rostec companies and acquisition of problem debt from the Bank’s balance; and (3) the significant degree of operational control.

In view of the above, ACRA believes that Rostec is willing and able to support the Bank if necessary, and therefore has added four notches to the Bank’s SCA.

Key assumptions

  • N1.2 CAR no lower than 8–9% within the 12 to 18-month horizon;
  • Cost of credit risk around 2%  within the 12 to 18-month horizon;
  • Maintained shareholder control on the part of Rostec.

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:

  • Significant reduction in concentration on largest clients and related parties with no deterioration in asset quality;
  • Higher capital adequacy ratios;
  • More balanced funding profile.

A negative rating action may be prompted by:

  • Deteriorating capital adequacy caused by higher cost of risk or aggressive growth of assets;
  • Declining importance and shrinking functionality of the Bank within the Rostec group.

Rating components

SCA: bbb-.

Adjustments: none.

Support: SCA + 4 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 based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation, Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

The credit rating assigned to Joint-Stock Commercial Bank “NOVIKOMBANK” was first published on October 19, 2018. 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 Joint-Stock Commercial Bank “NOVIKOMBANK”, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS financial statements of Joint-Stock Commercial Bank “NOVIKOMBANK” and financial statements of Joint-Stock Commercial Bank “NOVIKOMBANK” drawn up in compliance with the Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit rating is solicited, and Joint-Stock Commercial Bank “NOVIKOMBANK” participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Joint-Stock Commercial Bank “NOVIKOMBANK” in its financial statements have been discovered.

ACRA provided additional services to Joint-Stock Commercial Bank “NOVIKOMBANK”. No conflicts of interest were discovered in the course of credit rating assignment.

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