ACRA affirms BBB+(RU) to LOCKO-Bank, outlook Stable

The credit rating of LOCKO-Bank (hereinafter, the Bank) is based on the Bank’s satisfactory business profile and risk profile assessments, strong capital adequacy, and adequate funding and liquidity position.

LOCKO-Bank is a universal bank ranking 55th among Russian credit institutions in terms of capital and is present in six federal districts of Russia (except the Far Eastern Federal District), with its highest concentration in Moscow and other cities with populations of over 1 million. The principal lines of the Bank’s business include retail lending (mainly consumer loans and car loans) and SME financing (currently, the focus is on contractual business customers), primarily by attracting consumer funds into deposits and as part of private banking activities. The Bank is active in the securities market, intensively developing its geography of remote presence in Russian regions, and optimizing the existing network. The Bank’s shareholder structure is transparent, including its ultimate beneficiaries. Around 72.5% of shares are owned, directly or indirectly, by top managers and members of their families.

Key rating assessment factors

Satisfactory business profile. The Bank’s strategy is aimed at actively developing the digital business format (i.e. with minimum number of offices) in order to increase its competitive advantages and operational efficiency. The scope of Bank’s business may increase by both organic growth and by making M&A deals (however, this approach is unlikely in the near future). Operating income is moderately diversified (Herfindahl-Hirschman Index stood at 0.26 at the end of 2020). The quality of corporate governance is consistent with the scope and objectives of the Bank’s activities.

The substantial financial safety margin in terms of capital is based on high capital adequacy ratios under both under IFRS (Tier 1 ratio stood at 21.5% as of December 31, 2020) and regulatory standards (N1.2 stood at 15.8% as of June 1, 2021). This highlights the Bank’s ability to withstand an increase in the cost of risk by more than 500 bps. The Bank’s ability to generate capital is also assessed as high; the averaged capital generation ratio for the last five years has declined to lower than 200 bps, which is due to, among other things, dividend payments in 2020. At the same time, CTI (cost to income) and NIM (net interest margin), which have been indicative of the efficiency of the Bank’s activities for the last three years, stand at around 51% and 6%, respectively.

The Bank’s satisfactory risk profile assessment is driven by the acceptable quality of the loan portfolio, the share of which declined from 59% to 30% of assets as of March 31, 2021 amid active growth in securities market transactions.

As of March 31, 2021, the share of problem loans was 12.9% of the loan portfolio, including NPL90+ at 9.1%, involuntarily restructured loans at 3.6%, and potentially problem loans at 0.2% (according to the loan portfolio analysis by the 30 largest groups of borrowers). At the same time, loan portfolio concentration on the largest borrower groups (top 10 account for 8.2% of the portfolio) and high-risk industries (10.4% of Tier 1 capital) is assessed by ACRA as low.

Over the past 12 months, the Bank has significantly increased its securities portfolio (by 4.3 times to 55% of assets as of April 1, 2021), including about 68% of the portfolio encumbered through REPO transactions. The quality of the securities portfolio, which largely comprises floating-rate federal loan bonds (OFZs) and corporate bonds issued by issuers with high creditworthiness, and Bank of Russia bonds, is generally assessed as high. At the same time, ACRA believes that the Bank's vulnerability to market risk is still moderate.

Adequate funding and liquidity position. The assessment of the liquidity sub-factor is based on the Bank’s ability to withstand an outflow of client funds under both ACRA’s base case (short-term liquidity surplus at around RUB 19 bln) and stress scenarios (deficit of less than 1% of liabilities). If necessary, the Bank can raise financing through repo transactions, however, the possible volume of this financing is limited due to the fact that 68% of the securities portfolio is encumbered as of March 31, 2021. ACRA also sees no imbalances in the longer term (long-term liquidity shortage stood at more than 100% as of March 31, 2021).

The funding assessment has deteriorated because in Q4 2020, the Bank’s funding profile changed toward a significant concentration of the resource base on repo transactions with CCP NCC (ACRA rating AAA (RU), outlook Stable); as of March 31, 2021, the share in the Bank’s liabilities amounted to 41.6%. Direct repo deals are short-term in nature, but they are regularly prolonged. Due to the change of the largest funding source (the share of funds of individuals, including wealth management clients and sole proprietors in the Bank’s liabilities declined from 81% to 43% (as of March 31, 2021) over the past 12 months. Excluding funds raised from CCP NCC, the resource base concentration on the largest group of clients amounts to 7%, and on the ten largest groups — 16.3%. The Bank raises no funding from the Bank of Russia.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • NIM at around 5.5–6%;
  • Tier 1 CAR remaining high within the 12 to 18-month horizon;
  • Maintaining the current resource base structure.

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 strengthening of market positions while preserving a moderate risk appetite;
  • Significantly reduced problem or potentially problem loans in the loan portfolio.

A negative rating action may be prompted by:

  • Substantial decrease of Tier 1 CAR ratio and/or N1.2;
  • Increased problem loans in the loan portfolio;
  • Increased level of accepted market risks;
  • Deterioration in liquidity and/or funding position.

Rating components

SCA: bbb+.

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.

The credit rating assigned to LOCKO-Bank was published by ACRA for the first time on August 16, 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 LOCKO-Bank, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of LOCKO-Bank and the financial statements of LOCKO-Bank drawn up in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and LOCKO-Bank participated in its assignment.

In assigning the credit rating, ACRA used only information, the quality and reliability of which was, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.

ACRA provided additional services to LOCKO-Bank. No conflicts of interest were discovered in the course of credit rating assignment.

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