Training on sovereign risk credit analysis, October 24

ACRA assigns B(RU) to Joint Stock Commercial Bank "Interprombank", outlook Stable

The credit rating has been assigned to Joint Stock Commercial Bank "Interprombank" (the Bank) based on the Bank's satisfactory business profile, capital adequacy, funding and liquidity assessments, and the critical risk profile assessment.

The Bank is a medium-sized universal credit institution operating mostly in Moscow region. The Bank's priority business lines include lending to non-financial corporates and individuals and bank guarantees.

The Bank owners include several groups of individuals and legal entities. D. P. Mazurov, the founder and president of New Stream Group, with its core asset Antipinsky Oil Refinery, is indicated as a person exercising a significant influence of the Bank. As of June 01, 2018, the Bank ranked 86th in terms of capital and 132nd in terms of assets among Russian banks.

Key rating assessment factors

Satisfactory business profile assessment reflects a relatively low share held by the Bank in the Russian banking market, low diversification of its operating income, relatively transparent ownership structure, acceptable management quality and adequate strategy. The Herfindahl-Hirschman Index used by ACRA to assess the diversification of operating income was 0.39 in 2017. The strategy of the Bank envisages an increase in the volume of sales of credit products and cross-sales to retail customers, small and medium-sized businesses, and strengthening the Bank's positions in its traditional corporate segment; the strategy is generally assessed by ACRA as adequate.

Satisfactory capital adequacy assessment. As of June 01, 2018, the capital adequacy ratios were comfortable (N1.1, N1.2 = 11.6%, N1.0 = 15.8%), which is largely ensured by the support in the form of subordinated loans and funding provided by the Bank's owners. The current level of capital allows the Bank to withstand a risk increase exceeding 500 bps.

The assessment is affected by significant losses incurred by the Bank in 2016 and 2017, which were connected with allocation of reserves and assignment of problem assets. Therefore, ACRA assesses the Bank's capital generation capacity as weak: the average capital generation ratio calculated by ACRA is negative. The net interest margin (NIM) for the past three years is comparable to that of peers (6.1%), while the operational efficiency of the Bank is a significant negative rating factor: over the past three years, the average cost to income (CTI) exceeded 100%.

Critical risk profile assessment is primarily related to the high concentration of the loan portfolio (the share of top 10 groups of related borrowers exceeded 60% as of April 01, 2018), amid its average quality (as of April 01, 2018, the share of problem loans in the Bank's portfolio was 12.9%, including 2.9% NPL90+). 41.1% of problem loans are covered by reserves (NPL90+ are 96% reserved). At the same time, the Agency notes that the collateralization of loans granted by the Bank is low.

In addition, according to ACRA estimates, as of April 01, 2018, the concentration on loans to companies affiliated with shareholders or their business partners exceeded the core capital.

The Bank's balance sheet contains significant investments in real estate received as compensation or in foreclosure, as well as in the real estate investment funds (the volume of such investments net of reserves amounted to about 30% of the Bank's core capital).

In ACRA's opinion, the Bank's risk management system can be assessed as satisfactory, but, at the same time, the Agency notes that in the past, the risk management function failed to prevent the acquisition of low-quality assets by the Bank.

Adequate liquidity assessment. As of April 01, 2018, the short-term liquidity shortage indicator (STLSI) was positive in the base case scenario of ACRA (the liquidity reserve was about RUB 3 billion). In the stress scenario, the liquidity shortage is about 6%. The long-term liquidity assessment is adequate: the long-term liquidity shortage indicator (LTLSI) was about 70%.

The Bank's funding profile is characterized by the increased concentration on the top 10 groups of creditors (37% of the Bank's liabilities as of April 01, 2018). The resource base of the Bank includes mainly funds from individuals and legal entities (41.9% and 26.4% of liabilities, respectively).

Key assumptions

  • The Bank will pursue its current strategy;
  • N1.2 above 10% in the next 12–18 months;
  • Cost of risk not higher than 6%.

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:

  • lower concentration of the loan portfolio and lower share of problem loans;
  • lower share of investments in other balance sheet assets exposed to valuation risk;
  • lower volume of loans to affiliates;
  • successful implementation of the long-term strategy and higher diversification of operating income and operating efficiency of the Bank;
  • lower concentration on the largest groups of creditors.

A negative rating action may be prompted by:

  • a significant decline in capital adequacy ratios;
  • growing problem assets;
  • deteriorating liquidity position.

Rating components

SCA: b.

Adjustments: none.

Support: no.

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 has been assigned to Joint Stock Commercial Bank "Interprombank" for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (July 12, 2018).

The credit rating was assigned based on the data provided by Joint Stock Commercial Bank "Interprombank", information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS financial statements of Joint Stock Commercial Bank "Interprombank" and the financial statements of Joint Stock Commercial Bank "Interprombank" drawn up in compliance with Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and Joint Stock Commercial Bank "Interprombank" participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by Joint Stock Commercial Bank "Interprombank" in its financial statements have been discovered.

ACRA provided additional services to Joint Stock Commercial Bank "Interprombank". No conflicts of interest were discovered in the course of credit rating assignment.

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