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

The credit rating assigned to Modulbank (the Bank) stems from its satisfactory market position and high concentration of business strategy, adequate capital adequacy, satisfactory risk profile, and adequate liquidity and funding.

Modulbank is a medium-sized bank operating its own online platform and focused on SMEs. As of May 01, 2018, the Bank ranked 174th 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 current strategy assumes that the Bank focuses on integrated services to SMEs (bank account services, acquiring, accounting, guarantees under 44-FZ, etc.), which allows the Bank to diversify its operating income. In 2017, the Herfindahl-Hirschman index was 0.28.

ACRA notes that the Bank's strategy is aimed at an active growth of the portfolio of loans issued to small businesses and the volume of guarantees, as well as deposits from corporates and sole entrepreneurs.

Capital adequacy is assessed as 'adequate', which is attributable to the satisfactory capital adequacy ratios under the regulatory standards (N1.2 at 10.62% as of May 01, 2018); therefore, the Bank's ability to absorb credit risks is relatively high on the 12-18 months horizon. According to 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. In its estimates, ACRA also took into account the profit earned by the Bank in 2017, as well as possible prospects for a stably positive financial performance.

'Satisfactory' risk profile assessment hinges on the satisfactory quality of risk management and the high quality of the securities portfolio. As of January 01, 2018, the share of the securities portfolio in the total assets of the Bank was 77%, with a significant share of long-term instruments denominated in foreign currency. Therefore, the market risk accepted by the Bank is high (more than 470% of the core capital). At the same time, ACRA notes the good credit quality of these assets, which limits the potential negative impact of the market risk on the financial stability of the Bank.

On the other hand, ACRA expects a significant increase in the share of loans to small and micro businesses on the 12–18 months horizon (as a result of the Bank's strategy), the credit quality of which may affect the risk profile of the Bank in the future.

'Adequate' funding and liquidity. Both the base case scenario and the stress scenario of ACRA showed that, as at January 01, 2018, the Bank has a substantial liquidity surplus (over 30% of the total liabilities). ACRA found no imbalances for longer periods (as the long-term liquidity shortage indicator exceeds 85%); no large repayments or outflows are expected at the 12-months horizon.

ACRA notes that the Bank's concentration on funds raised from corporates and sole entrepreneurs. As of January 01, 2018, their share was over 65% of the total liabilities, and, in accordance with the Bank's strategy until 2020, the share will reach 77%. ACRA also notes that the excessive concentration of funding sources is counter-balanced by the low share of top 10 lenders (1.9% of the total liabilities of the Bank as of January 01, 2018).

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;
  • N1.2 CAR above 9% 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 business segment;
  • The common capital adequacy ratio growing above 12%.

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 to 2022);
  • Declining quality of the securities portfolio;
  • Deteriorating liquidity position;
  • Common capital adequacy ratio N1.2 going below 9%.

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

The credit rating has been assigned to Modulbank for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (May 30, 2018).

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. 4212-U dated November 24, 2016. 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: (1) the average capital generation ratio (ACGR) was calculated based on the expert assessment of the Bank's ability to generate capital equal to zero; (2) the performance indicators were estimated taking into account the net interest margin (NIM) and the cost to income (CTI) for 2017 only. In addition, in the market risk analysis within the rating model, ACRA stress test results were used, which, in the Agency's opinion, reflects more accurately the potential losses on the securities portfolio.

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