ACRA affirms A+(RU) to PJSC Sovcombank, changes outlook to Positive, affirms A+(RU) to bond issues RU000A0ZYJR6, RU000A100DZ5, RU000A101MB5, BBB+(RU) to bond issues RU000A0ZYWZ2, XS2010043656, and BB+(RU) to bond issue RU000A0ZYX28

The credit rating of PJSC Sovcombank (hereinafter, Sovcombank, or the Bank) is based on the adequate assessments of the business profile, risk profile, funding and liquidity, and the strong assessment of the capital position. The Bank’s systemic importance for the Russian banking system is reflected in the addition of one notch to its standalone creditworthiness assessment (SCA).

The change of the outlook to Positive reflects the continuing growth in the Bank’s traditional areas of development, and the increased level of universalization. In ACRA’s opinion, this may lead to a considerable strengthening of Sovcombank’s position in the Russian financial system within the 12 to 18-month horizon.

The affirmation of the Bank’s credit rating and SCA is grounds for the affirmation of the credit rating of the bond issues RU000A0ZYJR6, RU000A100DZ5 and RU000A101MB5, which represent senior unsecured debt, at A+(RU), the rating of  the subordinated bond issues RU000A0ZYWZ2 and XS2010043656, which are additional capital instruments, at BBB+(RU), and the rating of the subordinated bond issue RU000A0ZYX28, which is a fixed capital instrument, at BB+(RU).

Sovcombank is a universal bank that occupies a sustainable position in both retail lending (including car loans, mortgages, and classic consumer loans) and lending to legal entities. The Bank is one of the twenty largest credit institutions in the Russian market in terms of equity and assets and ranks eighth in volume of private deposits. According to data as of May 2020, Sovco Capital Partners B.V. accounted for around 86.5% of the Bank’s shares (37% of which belong to Dmitry and Sergey Khotimskiy), while the remaining shares are divided among shareholders and minor shareholders, including foreign sovereign and investment funds.

Key rating assessment factors

The Bank’s adequate business profile assessment is determined by its strong franchise in consumer lending and stronger competitive positions in lending to the large business and the SME sector. In 2019–2020, business growth of PJSC Sovcombank (hereinafter, the Group) came from increasing its assets in traditional areas of business and completing M&A transactions. In particular, Liberty Insurance (JSC) joined the Group (now Sovcombank Insurance (JSC)), and full control was received over Sollers-Finance LLC (now Sovombank Leasing LLC). The Group’s policy aimed at increasing product diversification, among other things, has resulted in a higher operating income diversification (the Herfindahl–Hirschman Index for 2019 amounted to 0.11). In addition, in ACRA’s opinion, the development of corporate lending, leasing and insurance will contribute to increasing the stability of the Bank and its capacity to endure periods of economic stress without incurring significant losses.

The Bank’s strong capital position is confirmed by sufficiently high capital adequacy ratios. As of July 1, 2020, N1.2 amounted to 11.96%, and Tier-1 amounted to 12.3% as of the end of 2019 and 10.5% as of the end of H1 2020. The capital adequacy assessment is also supported by the Bank’s strong capacity to generate internal capital: the averaged capital generation ratio (ACGR) considerably exceeds 200 bps for the last five years. As of the end of H1 2020, the Bank continued to generate profits, despite the increase newly created reserves. According to ACRA’s estimates, Sovcombank is able to withstand an increase in the cost of risk of over 500 bps without the RAS capital adequacy ratio falling below 6%. Operational efficiency is also at a sufficiently high level.

ACRA maintains its adequate assessment of Sovcombank’s risk profile. The quality of the loan portfolio (which amounted to 42% of assets as of December 31, 2019, excluding bonds reported at amortized cost) is characterized by a relatively low level of problem and potentially problem loans, in ACRA’s opinion. The share of Stage 3 loans under IFRS 9 was 3.6% as of December 31, 2019 and June 30, 2020 (NPL90+ = 2.9%). Taking into account loans classified by ACRA as potentially problematic, the total volume of problem and potentially problem debt reached 5.8% as of December 31, 2019. When assessing the risk profile, ACRA takes into account the increase in the volume of overdue loans in Q2 2020 (primarily loans to individuals), as well as their share in the portfolio. In addition, ACRA notes that in 2019 the Bank wrote off loans worth around RUB 5 bln (about 1% of the total loan portfolio), which were mainly represented by claims on individuals. In H1 2020, these loans amounted to RUB 5.7 bln (1% of the total loan portfolio).

In addition, ACRA notes the continued high rate of growth of the loan portfolio. In 2020, growth is mainly taking place in the corporate lending segment, but despite this, the concentration of the loan portfolio continues to be acceptable. The share of loans provided to the 10 largest groups of related borrowers amounted to around 19.5% of the loan portfolio as of December 31, 2019.

The concentration of the Bank’s assets on related parties and high-risk industries is still negligible. The securities portfolio is primarily made up of bonds with a high credit quality.

Adequate liquidity and funding position. Sovcombank can withstand an outflow of client funds with a margin in ACRA’s base case scenario, and has ample opportunities to attract additional liquidity in stress situations. As of June 30, 2020, the share of securities not encumbered as collateral for repurchase transactions amounted to 25% of the total assets (31% as of December 31, 2019). ACRA assesses the Bank’s long-term liquidity position as strong: the long-term liquidity shortage indicator exceeded 85% as of December 31, 2019.

The Bank’s resource base includes mainly retail deposits (45% of liabilities), and its concentration on the largest lenders is moderate.

Local systemic importance. In ACRA’s opinion, the Bank’s bankruptcy would cause problems in the financial sector and the socio-economic situation in certain Russian regions. As of May 31, 2020, the share of retail deposits held with the Bank accounted for 1.4% of the total volume of deposits serviced by the Russian banking system. Therefore, ACRA has added one notch to the Bank’s SCA.

Key assumptions

  • Maintaining strong competitive positions in key business segments;
  • Loan portfolio growth rate within the range of 15–20%;
  • Cost of credit risk around 3%;
  • Net interest margin within the range of 5–6%;
  • CTI lower than 50%;
  • Tier-1 capital adequacy above 9% within the 12 to 18-month horizon;
  • No change to current funding structure.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Sustained growth in the market share of key business segments;
  • Moderate risk appetite in the mid- and long-terms amid reduced volume of problem and potentially problem loans.

A negative rating action may be prompted by:

  • Deterioration of the Bank’s capital position as a result of an increase in the cost of credit risk and/or a decrease in operating efficiency;
  • Aggressive growth of retail lending and higher share of unsecured loans in the portfolio;
  • Increased volume of accepted market risk;
  • Deterioration of the Bank’s liquidity position caused by a reduction in highly-liquid assets on its balance sheet;
  • Loss of competitive advantages in key business segments.

Rating components

SCA: a.

Adjustments: systemic importance, SCA + 1 notch.

Support: none.

Issue ratings

Rationale.  The issues listed below represent senior unsecured debt of PJSC Sovcombank. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as pari passu with other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit rating of the issues is equivalent to that of PJSC Sovcombank, i.e. A+(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by PJSC Sovcombank, BO-05 series (RU000A0ZYJR6), maturity date: November 25, 2027, issue volume: RUB 10 bln — А+(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by PJSC Sovcombank, BO-P01 series (RU000A100DZ5), maturity date: May 17, 2029, issue volume: RUB 10 bln — А+(RU).

Certified exchange-traded interest-bearing non-convertible unregistered bond issued by PJSC Sovcombank, BO-P02 series (RU000A101MB5), maturity date: April 17, 2030, issue volume: RUB 12 bln — А+(RU).

Rationale. The bond issues listed below are  Tier 2 capital instruments, which envisages a significant level of subordination against priority unsecured creditors and determines the credit rating of the issue three notches below  PJSC Sovcombank’s SCA — BBB+(RU).

Certified interest-bearing non-convertible unregistered bond issued by PJSC Sovcombank, 2В03 series (RU000A0ZYWZ2), maturity date: February 21, 2029, issue volume: USD 150 mln — ВВВ+(RU).

Subordinated Eurobonds issued by PJSC Sovcombank (LPN, actual issuer: SovCom Capital D.A.C.) (XS2010043656), maturity date: April 7, 2030, issue volume: USD 300 mln — ВВВ+(RU).

Rationale. The bond issue listed below is a  Tier 1 capital instrument, which envisages a significant level of subordination against priority unsecured creditors and determines the credit rating of the issue five notches below  PJSC Sovcombank’s SCA — BB+(RU).

Certified interest-bearing non-convertible unregistered bond issued by PJSC Sovcombank, 1B02 series (RU000A0ZYX28), maturity date: N/A, issue volume: USD 100 mln — BB+(RU).

Regulatory disclosure

Credit ratings have been assigned to PJSC Sovcombank and the bonds (ISIN RU000A0ZYJR6, RU000A100DZ5,  RU000A101MB5, RU000A0ZYWZ2,  XS2010043656, RU000A0ZYX28) issued by PJSC Sovcombank 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. ACRA also used the Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments under the National Scale of the Russian Federation to assign credit ratings to the bond issues listed above.

The credit rating assigned to PJSC Sovcombank and the credit ratings assigned to the bonds (ISIN  RU000A0ZYJR6, RU000A100DZ5, RU000A101MB5, RU000A0ZYWZ2,  XS2010043656, RU000A0ZYX28) issued by PJSC Sovcombank were published by ACRA for the first time on November 25, 2016, December 7, 2017, May 30, 2019, April 28, 2020,  March 28, 2018, October 25, 2019, and March 28, 2018 respectively. The credit rating of PJSC Sovcombank and its outlook, as well as the credit ratings of the bonds (ISIN  RU000A0ZYJR6, RU000A100DZ5,  RU000A101MB5, RU000A0ZYWZ2,  XS2010043656, RU000A0ZYX28) issued by PJSC Sovcombank 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 PJSC Sovcombank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated financial statements of PJSC Sovcombank and the financial statements of PJSC Sovcombank composed in compliance with Bank of Russia Ordinance No. 4927-U dated October 8, 2018. The credit ratings are solicited, and PJSC Sovcombank participated in the rating process.

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

ACRA provided additional services to PJSC Sovcombank. No conflicts of interest were discovered in the course of credit rating process.

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