On May 17, 2018, Russia's Analytical Credit Rating Agency (ACRA) assigned a 'B+'(RU) credit rating to ORIENT EXPRESS BANK, with a stable outlook, the rating agency informed.
The credit rating assigned to ORIENT EXPRESS BANK (the Bank) results from moderate business profile, remaining pressure on capital adequacy ratios, high share of problem and non-core assets, adequate liquidity and funding driven by large amount of liquid securities in the Bank's portfolio as well as takes into account local systemic importance of the credit institution for the financial sector of the Far Eastern Region of Russia.
ORIENT EXPRESS BANK's strategy drawn up after the acquisition of UNIASTRUM BANK provides that the Bank is a multi-focus bank providing loan and related products to corporate clients including SMEs as well as offering loan and deposit products to individuals. The head office of the Bank is in the Far Eastern Federal District (Blagoveshchensk, Amur Region), where the Bank historically occupies a substantial market share. The Bank has eight branches located in Khabarovsk, Krasnoyarsk, St. Petersburg, Moscow, Nizhny Novgorod, Stavropol, Rostov-on-Don, and Yekaterinburg.
ACRA notes the Bank's strong position in the bank guarantees segment, and in particular, that the Bank ranks fourth in terms of the amount of issued guarantees under 44-FZ in 2017.
The main shareholders of ORIENT EXPRESS BANK are Evison Holdings Limited with a 51.62% stake controlled by Baring Vostok Group, and Finvision Holdings Limited with a 32.02% stake owned by A. Avetisyan, a Russian entrepreneur, who has a significant influence on the Bank.
Business profile is moderate (bb+) because the Bank's business diversification is relatively low: the Herfindahl-Hirschman Index used by ACRA to assess operating income diversification was 0.31 in 2018.
The Bank's strategy sub-factor, in ACRA's opinion, may be assessed as average in the context of the Russian banking sector. The ownership structure of the Bank is transparent; there are no reputational risks with respect to shareholders.
The quality assessment of the management system of ORIENT EXPRESS BANK takes into account the substantial size of risks taken earlier.
The capital adequacy of the Bank reflects potential risks capable of putting capital under pressure. At the same time, ACRA notes improvements in statutory ratios: the N1.2 CAR was 8.9% as of April 01, 2018 compared to 6.7% as of June 1, 2017. The current value of N1.2 largely stems from the change in the maturity of the subordinated Eurobonds, which allowed the Bank to include 100% of their nominal value into Tier-1 capital. In 1H2017, the holders of the US$ 125 million subordinated Eurobonds (due in 2019, coupon rate of 12% p.a.) approved the change of the maturity to 'perpetual' and the coupon rate to 10% per annum.
According to the Bank's IFRS statements, the Bank showed profits in 2016 and 2017. According to the RAS financial statements, the Bank had a loss in 2016 and generated a profit in 2017. In 2014 and 2015, the Bank suffered significant losses resulting from creation of loan loss provisions with respect to debt of individuals. In this regard, the value of the average capital generation ratio (ACGR) is negative. At the same time, the Bank's operational efficiency indicators are acceptable.
ACRA stress test reflects the Agency's opinion on potential risks related to problem loan debt on the Bank's balance sheet and other assets bearing risk of value change in view of the expected asset growth. The Bank is capable of withstanding an increase in the cost of risk of less than 300 bps without the N1.2 ratio falling below 6% in the absence of additional capital injections, which results in a 'critical' assessment of capital adequacy.
'Critical' risk profile assessment is caused by a high proportion of bad loans in the loan portfolio, a significant amount of other assets prone to value change risk, and a high market risk. Taking into account ACRA estimates, problem loans exceeded 26% of all loans issued (NPL90+'s share in the loan portfolio was 10.2% as of January 1, 2018, with the 35.4% coverage). The loan portfolio concentration on related parties and high-risk industries is assessed as 'moderate'.
Bank's investments into investment property and land, including agricultural lands, make up about 50% of IFRS Tier 1 capital. The market risk level stems from the portfolio profile that includes a significant amount of investments into securities of non-residents (with the majority of them having assigned credit ratings) as well as investments into securities of certain issuers, the fair value of which cannot be reliably estimated.
The liquidity and funding position is assessed by ACRA as 'adequate'. The Bank has excessive short-term liquidity in the base case scenario for calculating short-term liquidity shortage indicator (STLSI). In the stress scenario, the liquidity shortage does not exceed 10%. ACRA notes no imbalances over longer terms (long-term liquidity shortage indicator is about 130%).
The resource base concentration on the largest and top 10 lenders (depositors) is low, given that the funds of individuals and individual entrepreneurs prevail in the Bank's liabilities (about 84% of all liabilities as of January 1, 2018). At the same time, the diversification by source of funding is assessed as 'weak'.
Being founded in Blagoveshchensk city in 1991, ORIENT EXPRESS BANK is the largest bank in the Far Eastern Federal District (as at end-April 2018, the Bank had around RUB 47 billion in retail deposits from local residents). The Bank has more than 160 offices in the region servicing about 1 million customers. In addition, the Bank actively participates in regional social projects, including mortgage lending, public services centers based in the Bank offices, etc.). In ACRA opinion, the Bank's bankruptcy can cause problems in the regional financial sector and complicate the socio-economic situation in the region. This is reflected in the credit rating as an additional notch up to the standalone creditworthiness assessment (SCA) of the Bank.
"AK&M", 17.05.2018 15:45