ACRA affirms BB+(RU) to «AVANGARD» JSB, outlook Stable, and BB+(RU) to bond issue

The credit rating assigned to «AVANGARD» JSB (hereinafter, the Bank) is based on its satisfactory business profile, adequate capital adequacy, critical risk profile, and adequate funding and liquidity. The Bank’s creditworthiness is strong in the short time, with increased sensitivity to negative changes in the business, financial and economic environment in Russia.

«AVANGARD» JSB is a private bank that operates a wide branch network spanning across all federal districts of Russia. It is among top 50 Russian credit institutions in terms of capital. The Bank focuses on SME lending (predominantly in agribusiness and manufacturing sectors), stock market and interbank market operations, and transactional business. Kirill Minovalov is the majority shareholder of the Bank with 99.99% shares; he also holds the positions of the Bank’s President and BoD Chairman.

Key rating assessment factors

Satisfactory business profile. The Bank’s strategy provides for increase of risk-free transactional income and liquid assets amid decrease of credit risk accepted, which the Bank attributes to a weak recovery of operating environment. The operating income diversification is acceptable (the Herfindahl–Hirschman Index was 0.17 as of June 30, 2019), with the positive trend seen over the last five years. The corporate governance quality is assessed as satisfactory as matching the scope of Bank’s business; ACRA notes that the key shareholder of the Bank, Kirill Minovalov, actively participates in resolving strategic and most significant operating matters.

Adequate capital position is based on the high regulatory capital adequacy (as of August 1, 2019, N1.2 ratio was 15.4%, compared to minimum recommended 7.875% including conservation buffer), which enables the Bank to withstand a moderate risk costs increase without a breach of regulatory standards due to, among others, depreciation of non-performing and potentially non-performing loans. The capital generation capacity of the Bank is assessed as very high (the average capital generation ratio (ACGR) exceeded 300 bps over the last five years). Moreover, CTI and NIM were equal to 40% and 6.9%, respectively, as calculated by ACRA for the last three years.

Critical risk profile assessment is attributable to the low quality of loan portfolio (32% of assets), which includes a high share (about 50%) of NPLs and potentially NPLs (including 3.1% of NPL90+). The coverage of NPLs and potentially NPLs is 53%. The portfolio concentration on top 10 groups of borrowers equals to 70% of total loans, which is assessed as substantial. In ACRA’s opinion, the share of loans and liabilities due from the parties directly or indirectly related to the Bank may be as high as 55% of the common capital (excluding the non-listed shares of JSC Avangard-Agro). At the same time, the loan portfolio coverage is 80%.

The Bank’s exposure to market risk is assessed as relatively low, as the securities portfolio (29% of assets) includes about 36% of US Treasury bonds, 11% of Russian sovereign debt obligations, as well as Eurobonds and blue chips and shares in a related party, JSC Avangard-Agro (ВВВ-(RU), outlook Stable).

Receivables from financial institutions total 26% of the Bank’s assets and mostly include funds held on accounts with the Bank of Russia and reverse repurchase transactions made through the central counterparty.

The risk management system at the Bank is assessed as satisfactory.

Adequate liquidity and funding positions. The Bank is able to withstand the outflow of client funds in both the base case scenario (short-term liquidity surplus is RUB 43 billion) and the stress scenario (18% of liabilities). In addition, in case of need, the Bank may raise additional funds through repo transactions, in view of almost unencumbered securities portfolio. In a longer term, no liquidity imbalances are observed (as of June 30, 2019, the long-term liquidity shortage indicator, LTLSI, was 81%).

The resource base of the Bank is stable and mostly includes corporate client funds (around 50% of liabilities) and retail client funds (around 40% of liabilities). About 57% of client funds are demand deposits, which is positive for the funding costs of the Bank. The share of the largest groups of lenders in the resource base is low (2.2% for top 1, 5.9% for top 10). In the next 12 months, no significant outflow of funds is expected. As of June 30, 2019, the Bank had no borrowings from the Bank of Russia.

Key assumptions

  • The Bank’s business model will remain unchanged within the 12 to 18-month horizon;
  • Maintaining NIM at about 6%;
  • Maintaining N1.2 ratio above 10% in the next 12–18 months;
  • Maintaining the current resource base 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:

  • Consistently moderate risk appetite;
  • Consistently high capital generation capacity;
  • Substantially lower share of NPLs and lower concentration on the largest borrowers.

A negative rating action may be prompted by:

  • A substantial financial support to Bank affiliates;
  • Lower CAR resulting from additional provisions for loan portfolio;
  • Lower liquidity and higher concentration on the largest lenders.

Rating components

Standalone creditworthiness assessment (SCA): bb+.

Adjustments: none.

Support: none.

Issue ratings

Rationale. The issue represents senior unsecured debt of «AVANGARD» JSB. Due to the absence of either structural or contractual subordination of the issue, ACRA regards it as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Bank. According to the ACRA methodology, the credit rating of the issue is equivalent to that of «AVANGARD» JSB, i.e. BB+(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by «AVANGARD» JSB, BO-001P-02 series (RU000A1007Q1); maturity date: February 28, 2029, issue volume: RUB 3 bln — BB+(RU).

Regulatory disclosure

The credit ratings were assigned to «AVANGARD» JSB and bond issued by «AVANGARD» JSB (RU000A1007Q1) 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 Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation was also applied to assign the credit rating to the above bond issue.

The credit rating assigned to «AVANGARD» JSB and the credit rating assigned to bond (RU000A1007Q1) issued by «AVANGARD» JSB were first published by ACRA on September 28, 2017, and March 23, 2019, respectively. The credit rating and credit rating outlook of «AVANGARD» JSB as well as the credit rating assigned to bond (RU000A1007Q1) issued by «AVANGARD» JSB are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by «AVANGARD» JSB, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS statements of «AVANGARD» JSB and the financial statements of «AVANGARD» JSB drawn up in compliance with Bank of Russia Ordinance No. 4927-U of October 8, 2018. The credit ratings are solicited, and «AVANGARD» JSB participated in their assignment.

No material discrepancies between the provided information and the data officially disclosed by «AVANGARD» JSB in its financial statements have been discovered.

ACRA provided no additional services to «AVANGARD» JSB. No conflicts of interest were discovered in the course of credit rating assignment.

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