ACRA affirms ВB+(RU) to Modulbank, outlook Stable

The credit rating of Modulbank (hereinafter, the Bank) is based on its satisfactory market position and high concentration of business strategy, adequate capital adequacy, satisfactory risk profile, and adequate liquidity and funding.

Modulbank is a small bank operating its own online platform and focused on small and micro-sized businesses. As of January 1, 2019, the Bank ranked 170th by equity in Russia.

A.D. Avetisyan is the main beneficiary of the Bank, with the 68.3% share. Other shares are owned by his business partners and top managers of the Bank.

Key rating assessment factors

Satisfactory business profile assessment reflects a low share of the Bank in the Russian banking market and its stronger positions in the small business segment.

The Bank’s strategy assumes that it will continue to proactively develop its business with a focus on integrated services to small and micro-sized businesses (bank account services, acquiring, accounting, guarantees under 44-FZ, etc.), which allows the Bank to diversify its operating income. In 2018, the Herfindahl-Hirschman index was 0.29.

At the same time, as part of its analysis of the Bank’s business profile, the Agency downgrades the assessment of the ownership structure and business reputation because the main beneficiary of the Bank is involved in a corporate dispute in ORIENT EXPRESS BANK.

Capital adequacy is assessed as adequate, which is attributable to the adequate capital adequacy ratios under the regulatory standards (N1.2 at 14.6% as of January 1, 2019); therefore, the Bank’s ability to absorb credit risks is relatively high on the 12-18 month horizon. According to the ACRA stress test, the Bank can withstand a risk cost increase of more than 500 bps without violating the capital adequacy ratios.

The Bank’s historic ability to generate capital is estimated as low, because until 2017 the Bank was in its investment stage of development. According to ACRA estimates, the averaged capital generation ratio, ACGR, amounted to 19 bps in 2017–2018.

The Agency notes that the capital adequacy assessment is restricted by low operating efficiency: the average net interest margin under IFRS (NIM) totaled 3.2% in 2017–2018, and the cost to income ratio (CTI) 79.6%

Satisfactory risk profile assessment is based on the satisfactory quality of risk management and the high quality of the portfolio of guarantees and securities.

The main part of credit risk falls on issued guarantees, which exceed the Bank’s capital by more than four times. At the same time, ACRA assesses the credit quality of the guarantees portfolio as acceptable — potentially problem guarantees do not exceed 3.1% of the Bank’s fixed capital.

ACRA also points to the maintenance of the high level of market risk accepted by the Bank (more than 222% of fixed capital at the end of 2018). However, its influence is limited because the Bank invests in ruble-denominated debt securities of highly reliable issuers.

The Agency does not rule out the possibility of a significant increase in the share of loans to small and micro-sized businesses, as well as the growth of the portfolio of guarantees (as a result of the Bank's strategy), which credit quality can affect the assessment of the risk profile.

Adequate funding and liquidity. As of January 1, 2019, the Bank was able to withstand a significant outflow of client funds in both the base case scenario (up to RUB 2.8 bln) and the stress scenario (shortage of 6.2% of the total liabilities) applied by ACRA. On longer-term horizons, ACRA sees no imbalances (long-term liquidity shortage indicator, LTLSI, exceeds 85%), and no large-scale redemptions or outflows of funds are expected in the next 12 months.

ACRA points to the Bank’s increased concentration on funds raised from corporates and sole entrepreneurs. As of January 1, 2019, their share exceeded 90% of the total liabilities. ACRA also notes that the excessive concentration of funding sources is counter-balanced by the low share of the top ten lenders (3% of the total liabilities of the Bank as of January 1, 2019).

Key assumptions

  • Maintaining the current strategy and business model in the next 12-18 months;
  • Maintaining the high quality of the portfolio of securities and guarantees;
  • Maintaining the N1.2 CAR above 12% in the next 12–18 months.

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:

  • The Bank’s stronger franchise based on the growing share in the small and micro-sized business segment;
  • Higher operational efficiency of the Bank.

A negative rating action may be prompted by:

  • Higher credit risk due to a substantial growth of the loan and guarantee portfolios at the Bank’s strategy horizon (up until 2022);
  • Declining quality of the securities portfolio;
  • Deteriorating liquidity position;
  • The N1.2 CAR falling below 12%.

Rating components

SCA: bb+.

Adjustments: no.

Support: no.

Issue ratings

There are no outstanding issues.

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 Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of Modulbank was first published by ACRA on May 31, 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 Modulbank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS statements of Modulbank and statements of Modulbank composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit rating is solicited, and Modulbank participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by Modulbank in its financial statements have been discovered.

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

Disclosure of deviations from the approved methodology. Due to the fact that, in the analyzed period, Modulbank was in its investment stage of development the performance indicators were estimated taking into account the net interest margin (NIM) and the cost to income (CTI) before provisions for 2017 and 2018 only.

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