ACRA affirms A(RU) to «Bank «Saint-Petersburg» PJSC, outlook Stable

The affirmation of the credit rating of «Bank «Saint-Petersburg» PJSC (hereinafter, the Bank) at A(RU), outlook Stable, is a reflection of ACRA’s expectations that the Bank will continue to occupy leading positions in the banking sector of St. Petersburg and the Leningrad Region while maintaining a relatively high level of diversification of operations in terms of individual counterparties. ACRA believes that these factors will help the Bank balance the growing risks triggered by the economic crisis.

The Bank is one of the twenty largest credit organizations in the Russian Federation and is among the most significant regional banks. The Bank focuses on St. Petersburg, the Leningrad Region, and Moscow. Its key business lines are corporate and retail lending, foreign exchange operations and interbank deals, servicing legal entities, and securities transactions.

The Bank’s main owners are its senior managers, headed by Chairman of the Management Board A. V. Savelev. Together with small shares in capital that belong to the members of the Supervisory Board and stocks purchased by the Bank itself in previous periods, the total share of this group of owners stands at around 52% of capital (including repayment on shares on June 8, 2020). An additional 38% stake is in free float, which means that the Bank is a publically traded company. The remaining share is distributed between the European Bank for Reconstruction and Development and various non-strategic owners and minority shareholders.

Key rating assessment factors

The adequate business profile assessment (bbb+) is based on the Bank’s stable market positions in the Russian financial sector and in St. Petersburg and the Leningrad Region in particular. Over the next 12–18 months, the Bank should continue to strengthen its local presence using its broad regional experience and well-established partnerships with clients and local government bodies.

ACRA views the reduction of risk appetite amid the unfavorable economic situation as a positive factor. Namely, the Bank has decided to temporarily suspend payments of dividends and share buyback programs and has also revised its lending growth target downward to 8% in 2020, i.e. practically cut it in half. These measures will support the Bank’s loss absorption capacity over the next 12–18 months.

In addition to a recognizable brand and strong market positions, the stability of the Bank’s business is largely due to its relatively high level of diversification of operations in terms of individual counterparties compared to other Russian banks: the 10 largest borrowers and depositors account for around 20% and only 5% of the Bank’s loan and deposit portfolios, respectively. The latter is a key factor that ensures the stability of the Bank’s deposit base.

The adequate capital adequacy position is based on the current relatively comfortable level of capitalization and the Bank’s proven ability to generate relatively predictable income. In addition, the assessment takes into account the negative impact on the Bank’s capitalization driven by the weakening of the ruble in Q1 2020. In particular, the Tier-1 capital adequacy ratio (CAR) calculated in accordance with Basel I standards fell by approximately 1 percentage point compared to the start of the year to 12.9% as of March 31, 2020. As per ACRA’s base case scenario, a significant decline in capital adequacy is not expected before the end of the year. The negative effect from the predicted decline in return on equity (ROE) down to around 5% in 2020 caused by growing economic risks will be partly offset by the suspension of dividend payments and share buybacks (for comparison, ROE was 10.2% in 2019 and averaged around 11.4% in 2017–2019).

The Bank’s operational efficiency is comparable to similar banks rated by ACRA and has a neutral impact on the capital assessment. ACRA expects the Bank to maintain its net interest margin (NIM) at the current level of 3.5–4.0% over the next 12 months. ACRA expects the cost-to-income ratio (CTI) to stay at a level similar to the one recorded in Q1 2020 (around 45–50%), despite the Bank’s intention to optimize costs. A tougher operating environment and significant growth in IT expenses since the start of the year will put pressure on this indicator.

Satisfactory risk profile. According to ACRA’s assessments, the share of potential problem loans is around 12–14% of the Bank’s loan portfolio. The risks of deterioration in portfolio quality amid the economic downturn are somewhat mitigated by the Bank’s actions to reduce the concentration of the portfolio on the highly risky construction sector and on the real estate sector (according to ACRA’s assessments, although the volume of loans issued to companies from the aforementioned sectors is declining, it is still comparable to the size of Tier-1 capital under Basel standards). As of the end of March 2020, the level of coverage of potential problem loans by impairment reserves was around 60–65%.

The Bank’s foreign currency position is usually almost closed, which minimizes the risk of direct negative impact on capital as a result of losses associated with currency revaluation. Nevertheless, ACRA notes the considerable share of assets denominated in foreign currency (around 33% of the balance sheet as of the end of March 2020). The revaluation of these assets in Q1 2020 increased the size of exposures at default and thereby put pressure on the Bank’s capital adequacy. The Bank actively uses foreign exchange derivative financial instruments (which accounted for approximately 85% of equity as of March 31, 2020) to manage currency positions by maturity, as well as to earn arbitrage income. In ACRA’s opinion, this approach leaves the risk that the cost of using such instruments may differ significantly and unpredictably from current and expected levels, depending on the market sentiment and the availability of a particular currency on the market. The abovementioned risks are somewhat mitigated due to the relatively short maturity of these instruments. In addition, exchange rate volatility can lead to increased credit risk for foreign currency borrowers, whose loans account for about 20% of the Bank’s portfolio.

Adequate funding and liquidity position. ACRA notes the Bank’s rather aggressive asset and liability management policy aimed at supporting the NIM. The Bank’s approach assumes a relatively low liquidity cushion amid the predominantly short-term nature of client funds and a significant share of interbank liabilities (usually 20–25% of the Bank’s total funding base), which may be subject to greater volatility during periods of uncertainty in the financial market. As a result, the Bank’s liquid assets, net of short-term (up to a year) and potentially volatile interbank liabilities, cover only 14% of all client funds. ACRA expects this figure to fall to 10–11% over the course of 2020.

However, the abovementioned risks are mitigated by the low concentration of the portfolio on individual depositors, since about 60% of deposits are held by individuals (and the Bank is targeting a further increase in this ratio to 70%). ACRA also takes into account the proven stability of the Bank’s deposit base and a strong, recognizable brand that helps to retain and attract new depositors. In particular, the sharp fall in the ruble exchange rate and uncertainty about oil prices, economic growth, and the spread of coronavirus observed in Q1 2020 did not have a critical effect on the Bank’s liquidity position, which also supports ACRA’s view of the adequate funding and liquidity profile. In addition, ACRA believes that in the event of liquidity stress, the Bank may receive priority assistance from the state, since, according to ACRA, the Bank is a systemically important financial institution for St. Petersburg and the Leningrad Region.

Local importance for the region. According to ACRA, the Bank is an important part of St. Petersburg’s and the Leningrad Region’s economy. Therefore, ACRA believes that in the case of stress, it can rely on state aid aimed at supporting capital or liquidity. As such, the Bank’s final rating takes into account one notch of support added to its standalone creditworthiness assessment (SCA).

ACRA believes that disruptions in the Bank’s ongoing operations could cause problems in the financial sector and the socio-economic situation of the region. As of the end of March 2020, the amount of consumer funds in the Bank’s portfolio amounted to about 8.5% of all client funds of individuals in St. Petersburg banks, which is a significant share and a key factor determining ACRA’s position regarding the Bank’s local systemic importance. In addition, the Bank services a significant amount of payments to state-funded companies in St. Petersburg and their employees and is the third most important Bank in the region, actively involved in providing mortgage loans to individuals.

Key assumptions

  • Maintaining leading positions in the region within the 12 to 18-month horizon;
  • Maintaining Tier-1 capital adequacy according to Basel standards above 9% within the 12-month horizon;
  • Maintaining the current quality of assets;
  • Stable funding base.

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:

  • Significant reduction in problem lending or loan concentrations in the construction and real estate sector amid easing economic risks;
  • Stable growth in profitability while maintaining Tier-1 capital adequacy according to Basel standards above 12%.

A negative rating action may be prompted by:

  • Growth in problem exposures significantly higher than 15% of the loan portfolio with a non-decreasing share of loans to companies in the construction and real estate sector;
  • Increased single-name concentrations in the deposit and loan portfolios;
  • Signs of decreasing stability in the funding base that could significantly impair the Bank’s liquidity position;
  • Signs of deteriorating systemic importance or decreased willingness and/or ability of the state to provide support to the banking sector;
  • More aggressive development strategy or significant credit losses leading to a decrease in the forecasted Tier-1 capital adequacy according to Basel standards below 9%.

Rating components

SCA: a-.

Adjustments: none.

Support: local systemic importance, plus 1 notch to the SCA.

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

The credit rating assigned to “Bank “Saint-Petersburg” PJSC was published by ACRA for the first time on December 21, 2016. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by “Bank “Saint-Petersburg” PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the IFRS consolidated statements of “Bank “Saint-Petersburg” PJSC and the statements of “Bank “Saint-Petersburg” PJSC composed in compliance with the Bank of Russia Ordinance № 4927-U dated October 8, 2018. The credit rating is solicited, and “Bank “Saint-Petersburg” PJSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by “Bank “Saint-Petersburg” PJSC in its financial statements have been discovered.

ACRA provided additional services to “Bank “Saint-Petersburg” PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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