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ACRA affirms the credit rating of Bank NCC (JSC) at AAA(RU), outlook Stable

The credit rating of Bank NCC (JSC) (hereinafter – NCC, or the Bank) is based on its strong and stable business profile, exceptional liquidity position and high capital adequacy, with the latter compensating for the risk profile. The rating is additionally supported by NCC’s critical systemic importance for the Russian financial market.

As a subsidiary of Moscow Exchange Group, NCC performs functions of a clearing organization and central counterparty on the Russian financial market.

Key rating assessment factors

Strong business profile, which is reflected in the Bank’s key role as a clearing organization and central counterparty ensuring the majority of transactions in the key segments of the Russian financial market. We note high corporate governance and risk management standards implemented at NCC enabling it to perform activities with the minimum accepted risk relative to the scope of transactions.

Maintaining strong capital adequacy position (16.7% as at June 30, 2017) enables not only securing multiple levels of protection for the parties in transactions with the central counterparty, but also a substantial loss absorption cushion in case of a potential impairment of its assets in a stress scenario (680 bps). ACRA expects that NCC’s profit margins will be under pressure amid lower interest rates environment, however, as they are relatively high (ACGR of 200-250 bps) and the Bank’s dividend policy is reasonable, no radical drop in capital adequacy level is expected.

Counterparty risk of NCC is mitigated by virtue of rigid admission criteria for participants and strict margining policy (with prompt marked-to-market reevaluations). Although a number of large banks experienced difficulties in 2017, the Bank neither incurred any losses, nor deployed central counterparty protection levels. Risk profile assessment is limited by a substantial amount of assets with market risk (primarily interest rate risks) exposure (257% of core capital as at end of June 2017). The expected changes in the protection level structure of the central counterparty and increased contributions to guarantee funds are assessed by ACRA as positive for the overall risk profile of NCC.

NCC’s critical systemic importance for the Russian financial market. NCC is a systemically important central counterparty according to the methodology of the Bank of Russia. In our opinion, a default (termination of activities) of NCC may lead to a systemic crisis in most of Russian financial market segments, which in turn might have a significant negative impact on financial stability and economic condition of the entire country.

We expect that change of NCC’s status from a bank into a central counterparty in form of a non-banking credit institution by the end of 2017 will not result in deterioration of standalone creditworthiness of the Bank, while the quality of regulatory control will stay the same. According to NCC’s management estimates, regulatory requirements driven by the Bank’s new status will be exceeded substantially.

Key assumptions

  • NCC retains the role of a systemically important clearing organization and central counterparty in Russia;
  • No material financial obligations (debt);
  • Excessive liquidity position is maintained;
  • Use of NCC's resources for supporting other companies within Moscow Exchange Group is not expected.

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 negative rating action may be prompted by:

  • A significant deterioration of the NCC's capital adequacy as a result of profitability decline or aggressive dividend policy;
  • Deterioration of the liquidity position resulting from a reduction in the liquidity cushion or credit quality deterioration of high-liquid assets on the Bank’s balance sheet.

Rating components

Standalone creditworthiness assessment (SCA): aa.

Adjustment: systemic importance, 3 notches up.

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 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.

For the first time, the credit rating has been assigned to Bank NCC (JSC) on October 31, 2016. The credit rating and its outlook have been revised on October 24, 2017. The next revision of the credit rating is expected within one year following the rating action (October 24, 2017).

Disclosure of deviation from the approved methodologies. As part of the funding and liquidity factor, funding source diversification assessment was adjusted by one notch up considering non-banking nature of NCC’s business and no need to have other funding sources for its activities.

The assigned credit rating is based on the data provided by Bank NCC (JSC), information from publicly available sources, as well as ACRA’s own databases. The credit rating is solicited and Bank NCC (JSC) participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Bank NCC (JSC) in its financial report have been discovered.

ACRA provided an additional service to Bank NCC (JSC) in the form of informational support (a practical seminar). No conflicts of interest were discovered in the course of credit rating assignment.

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