ACRA affirms credit rating of Expobank LLC at BBB+(RU), outlook Stable

Affirmation of the credit rating of Expobank LLC (hereinafter, Expobank, or the Bank) is based on its sustainable business profile, high capital adequacy, satisfactory risk profile, and strong liquidity and funding position.

Expobank is a medium-sized Russian bank in terms of assets and capital, ranking 82nd and 69th (including Yapi Kredit Bank Moscow) respectively on the national scale as of end-2017. The majority stake is controlled by the Russian entrepreneur Igor Kim (directly owned 69.8% as at early 2018) who also owns banking assets in Czech Republic, Latvia, and Serbia. Other key shareholders are German Tsoy (17.6%) and a number of other individuals including the Bank’s management team members.

Key rating assessment factors

Business profile is generally on par with those of sustainable medium-sized Russian banks and reflects its relatively small franchise, which is focused on a limited number of corporate borrowers located mainly in the Moscow region and accounting for about 90% of assets and operating income of the Bank. Expobank specializes in servicing corporate customers, buying and selling retail loan packages, and M&A deals. ACRA notes that significant credit risks inherent in the Russian banking sector as a whole may entail implicit risks for M&A transactions and third-party portfolio acquisitions, with those risks capable of becoming explicit despite the significant M&A expertise of the Bank’s management.

Expobank boasts a rather diversified business (its Herfindahl–Hirschman operating income diversification index historically hovers around 0.2) and a transparent ownership structure exhibiting a low degree of affiliation with non-banking business of its key shareholders.

The Bank demonstrates strong capital adequacy indicators according to both the regulatory (8.9% as at January 1, 2018 excluding capital of Yapi Kredi Bank Moscow) and Basel standards (the Bank estimated its Tier-1 capital under IFRS at 15.1% as at early 2018).  High core capital adequacy is based on a considerable power of the Bank in generating capital through income including income from M&A deals:  the averaged capital generation ratio, ACGR, totaled 434 bps in 2013-2017. ACRA also notes the positive effect of its conservative asset growth strategy on capital adequacy. ACRA’s stress test confirms high loss absorption capacity of the Bank’s capital.

Satisfactory risk profile stems from low level of overdue and restructured loans in the Bank’s balance sheet. According to ACRA estimates based on the Bank’s management reporting data, such loans accounted for 3.2% of its total loan portfolio as at January 1, 2018. ACRA notes an adequate risk management at the Bank, which translates into low overdue debt and high credit quality of claims beyond the loan portfolio. The Bank’s risk profile assessment is limited by potentially problem loans present in its portfolio (according to the ACRA methodology, currently serviced loans of increased non-payment risk) as well as relatively high concentration on lending to high-risk industries, construction and real estate, primarily (around half of the tier 1 capital of the Bank).

The rest of Expobank’s assets are represented by a sizeable and high-quality securities portfolio and short-term interbank loans, including repo receivables, whose credit risk is assessed as low.

Adequate assessment of the Bank’s funding and liquidity profile is based on the combination of the strong position in short-term and long-term liquidity and the satisfactory funding quality.

ACRA notes the large amount of liquid and highly liquid assets that allowed the Bank to show a substantial short-term liquidity surplus under both the base case and the stress scenarios. ACRA also notes strong long-term liquidity shortage indicator (LTLSI) that to-taled 101% as at end-2017. The liquidity position largely hinges upon the fixed income securities portfolio, which is dominated by federal OFZs and Eurobonds, as well as by bonds of high-quality quasi-federal and corporate borrowers.

The Bank’s funding structure is affected by growth of concentration on the largest funding source: funds of individuals (62% of the liabilities as at end-2017).  

Key assumptions

  • Adhering to the current business model within the 12 to 18-month horizon;
  • Cost of risk capped at 3%-4%;
  • Net interest margin around 5%;
  • Tier-1 capital adequacy (N1.2) not lower than 8.0% within the 12 to 18-month horizon.

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:

  • Making the funding structure more balanced;
  • Sustaining of the current core capital adequacy level;
  • Long-term adherence to a business strategy focused on a weighted approach to M&A deals and short-term loan portfolio acquisitions.

A negative rating action may be prompted by:

  • An aggressive M&A policy with regard to other financial institutions that may result in deteriorating loan portfolio quality and persistently declining core capital adequacy;
  • A substantial deterioration of risk management quality resulting in higher number of problem loans and exerting pressure on the capital.

Rating components

Standalone creditworthiness assessment (SCA):  bbb+.

Adjustments: none.

Support: no systemic importance.

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..

The credit rating of Expobank LLC was published by ACRA on March 3, 2017 for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action (February 28, 2018).

The assigned and affirmed credit rating is based on the data provided by Expobank LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of Expobank LLC and statements of Expobank LLC composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and Expobank LLC participated in its assignment.

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

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

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