Training on sovereign risk credit analysis, October 24

ACRA upgrades the credit rating of “Bank “Saint-Petersburg” PJSC to A(RU), outlook Stable

The upgrade to the credit rating of “Bank “Saint-Petersburg” PJSC (hereinafter, the Bank) reflects the improvement in the Bank’s risk profile via decreased market risk and improvement in the quality of assets carrying credit risk. The increased level of problem loans and portfolio concentration on high-risk industries continue to limit the Bank’s standalone creditworthiness. The Bank is characterized by a stable and moderately conservative business model (in the context of the Russian banking market) and satisfactory capital adequacy. The credit rating is supported by the Bank’s local systemic importance for Russia’s North-Western Federal District.

Being one of Russia’s largest regional banks, the Bank focuses on Saint-Petersburg, the Leningrad Region, Moscow, and Kaliningrad. Its key business lines are lending, corporate and retail cash management and banking services, trading in the foreign exchange and interbank markets, and securities transactions. The Bank is among the twenty largest credit institutions in the Russian market in terms of capital and assets.

Key rating assessment factors

Sustainable business model based on organic growth. The Bank’s positions are strong, primarily in the banking market of St. Petersburg and the Leningrad Region. The Bank has demonstrated moderate business growth rates comparable with the industry average. The advanced growth in retail lending is mainly due to the increase in mortgage lending at rates that do not exceed the market average. ACRA notes increased commission revenues from the transaction business, which the Bank's development strategy stipulates. The Agency does not expect a significant transformation in the Bank’s business model within the 12 to 18-month horizon. ACRA notes the satisfactory level of competence and stability of the Bank’s top management team.

Adequate capital adequacy. The moderate growth of risk-weighted assets along with increased profitability (ACGR at 100 bps over the last five years) have allowed the Bank to maintain adequate loss absorption reserves in line with both regulatory requirements and Basel standards (Tier 1 CAR amounted to 13.4% as of the end of December 2018). Within the 12 to 18-month horizon, the Bank’s capital will grow organically through profits. The Bank’s conservative policy with respect to reserves for problem loans has ensured a comfortable loss-absorbing cushion in ACRA’s stress scenario.

The upgrade of the risk profile assessment to satisfactory is based on reduced market risk primarily via reduced investments in corporate Eurobonds in favor of bonds of the Bank of Russia. According to ACRA, the total level of problem and potentially problem loans decreased to 13.4% of the Bank’s loan portfolio; NPL90+ from January 1, 2018, to January 1, 2019, reduced from 5.4% to 5.1% of the loan portfolio. In addition, the reserve coverage on problem loans amounted to 39%. The risk profile assessment continues to be limited by the increased concentration of the loan portfolio on high-risk industries (111.7% of common equity as of the end of December 2018 compared to 124.6% a year earlier).

Adequate liquidity position. Despite the predominance of short-term funding from money markets, a sufficient volume of highly liquid assets (around 10% of total assets) and a creditor-diversified base of customer funding ensure an adequate liquidity assessment.

The Bank is able to withstand an outflow of client funds under ACRA’s base case scenario; as of the end of December 2018, its short-term liquidity shortage indicator (STLSI) stood positive within a three-month forecast horizon, with the liquidity cushion amounting to around RUB 70 bln. Under ACRA’s stress scenario, the shortage stood at 5.1% of total liabilities, which is acceptable for a large Russian bank. ACRA’s stress scenarios include the assumption of a renewable nature of at least 50% of short-term (up to three months) corporate deposits.

Importance for the regional economy. The Bank plays an important role in the economy of St. Petersburg and the Leningrad Region. As of January 1, 2019, it held about RUB 234 bln of deposits by individuals permanently residing in the North-Western Federal District and another RUB 145 bln deposited by corporates. In addition, the Bank handles a significant volume of cash payments by St. Petersburg’s public sector companies and their employees. According to ACRA, bankruptcy by the Bank could potentially cause problems for the financial sector and the socio-economic climate in the region. In terms of the credit rating, this is reflected in one notch added to the Bank’s standalone creditworthiness assessment (SCA).

Key assumptions

  • Maintaining strong competitive positions in the core region;
  • Loan portfolio growth rate within 6% in 2019;
  • Cost of credit risk within 3%;
  • Tier-1 capital adequacy (N1.2) above 10% within the 12 to 18-month horizon;
  • Maintaining the current funding profile.

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:

  • Substantial decline in the level of problem loans;
  • Increased capital adequacy and maintaining it at a high level;
  • Lower concentration of the loan portfolio on high-risk industries.

A negative rating action may be prompted by:

  • Reduced systemic importance for the regional economy;
  • Substantial growth in problem loans;
  • Substantially more aggressive growth strategy and/or dividend policy leading to a steady decrease in capital adequacy.

Rating components

Standalone creditworthiness assessment (SCA): а-.

Adjustments: none.

Support: systemic importance, 1 notch up to the SCA.

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

The credit rating assigned to “Bank “Saint-Petersburg” PJSC was published by ACRA for the first time on December 21, 2016. 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 “Bank “Saint-Petersburg” PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of “Bank “Saint-Petersburg” PJSC and statements of “Bank “Saint-Petersburg” PJSC composed in compliance with the Bank of Russia Ordinance № 4927-U dated October 8, 2018. The credit rating is solicited, and “Bank “Saint-Petersburg” PJSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by “Bank “Saint-Petersburg” PJSC in its financial statements have been discovered.

ACRA provided additional services to “Bank “Saint-Petersburg” PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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