Russia-Based CentroCredit Bank Outlook Revised To Negative On Potential Capital And Liquidity Constraints

  • Since the beginning of 2020, CentroCredit's regulatory capital adequacy ratio deteriorated to 18% from 28% due to significant losses from its securities portfolio.
  • Although the bank maintains a large capital buffer above the regulatory minimum, we see a risk that its capital position may deteriorate further if volatility in the Russian financial markets persists.
  • We are revising our outlook on the bank to negative from stable and affirming our 'B/B' long- and short-term ratings.
  • The negative outlook indicates that we could lower the ratings in the next 12 months if CentroCredit's capitalization declines further, or if we believe that its liquidity metrics are coming under pressure.
MOSCOW (S&P Global Ratings) March 24, 2020--S&P Global Ratings revised its outlook on Russia-based CentroCredit Bank JSC to negative from stable. At the same time, we affirmed the 'B/B' long- and short-term issuer credit ratings on the bank.
The outlook revision reflects our view that CentroCredit's creditworthiness may come under pressure if significant volatility on the Russian financial markets persists or intensifies, leading to a deterioration of the bank's capital or liquidity position.
In the first quarter of 2020, CentroCredit's regulatory capital adequacy ratio (CAR) has already fallen by almost 1000 basis points--to 18% as of March 16, 2020 from 28% as of Dec. 31, 2019. This decline follows revaluation losses from the bank's traditionally large investments in Russian equities and sovereign bonds, and indicates the high sensitivity of the bank's capital position to volatile trading income.
We consider that the bank's capital position might remain under pressure, with its CAR moving closer to the regulatory minimum, which would increase the potential risk of a regulatory breach. Likewise, additional trading losses might lead to a decline in our risk-adjusted capital (RAC) to below 10%, which would have negative implications for the ratings. This is because the bank maintains a large stake in Russian government bonds, which represented about 50% of total assets as of mid-March 2020, and almost all of which has been pledged under repurchase agreements with the Central Bank. Moreover, equity investments, which are traditionally more volatile, will likely remain around 15%-17% of the bank's total assets in coming months.
We recognize, however, that the bank maintains flexibility in managing its capital and liquidity position. In particular, the bank holds relatively liquid assets and can reduce its securities portfolio to provide relief for its CAR. Moreover, we think that the bank maintains a sufficient buffer above the regulatory minimum (about 1000 basis points) to absorb additional losses from its securities portfolio and remain a going concern. Finally, the bank has accumulated a significant buffer of cash and equivalents, representing about 20% of its total assets as of mid-March 2020.
In our view, CentroCredit's business position is weak, reflecting the bank's small market share, weak lending and deposit franchise, and high revenue volatility, due to its focus on trading and other market-sensitive income. Nevertheless, we acknowledge the bank's stable customer base and steady management team, which has a good level of expertise in the Russian financial market.
We note that the bank's extensive trading activity constrains its risk profile. However, we believe that the bank is much less vulnerable to credit, rather than market, risk. In particular, the bank maintains a very high coverage of its loan portfolio (as of year-end 2019, 55% of all loans were covered by provisions), though with a share of Stage 3 loans of about 9.0%, the bank is close to the system average. Moreover, the bank's bond investments are limited to Russian sovereign bonds.
Collateralized funding from the Central Bank is currently a significant source of the bank's funding base. However, we consider this as neutral for the bank's funding and liquidity assessment and do not consider it as emergency funding. This mainly reflects liquid collateral (Russian government bonds) and a lack of imbalances between the bank's assets and liabilities. We note that the bank still has high funding and liquidity ratios, with an estimated stable funding ratio (SFR) of more than 150% and broad liquid assets to short-term wholesale funding exceeding 1.0x. This, in turn, reflects the bank's predominantly liquid assets and high capital buffer as the most stable funding source.
The negative outlook reflects our view that the bank's capital and liquidity profile may deteriorate over the next year if losses persist, including those from adverse market conditions.
We could lower the ratings in the next 12 months by one or several notches if the bank's capitalization weakens, for example if its capital adequacy ratio is at risk of breaching the regulatory minimum or our risk-adjusted capital ratio falls below 10%. High revaluation losses from the bank's securities portfolio may also strain our assessment of the bank's business and risk profile, and could therefore lead to a negative rating action. Weakening liquidity metrics may also result in a downgrade.

We could affirm the ratings and revise the outlook back to stable if the bank is able to maintain strong capital and liquidity buffers, and if we see the risk of capital or liquidity deterioration diminishing owing to management actions or reduced market volatility.
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