Prokhorov's bank rating downgraded due to withdrawal of money by VIP depositors

"Expert RA" downgraded the rating of the "International Financial Club" by two steps at once, after the bank, which focuses on VIP clients, faced with the withdrawal of foreign currency in March. The IFC itself states,

Bank "International Financial Club" (IFC), the main shareholder of which is billionaire Mikhail Prokhorov, was the first Russian player from the top 100, whose credit rating was downgraded by the national rating agency after February 24. On April 18, the Expert RA agency downgraded IFC's rating by two notches, to 'ruBB-', revising the outlook from 'stable' to 'negative'. As noted in the agency's message, this happened, among other things, due to the "weakening of the liquid position" of the bank against the backdrop of operations by VIP depositors.

As of February 1, the International Financial Club ranked 74th in RUSSIA in terms of assets (83.7 billion rubles) and 100th in terms of capital (7.8 billion rubles), according to the banki.ru ranking. He specializes in servicing current accounts and attracting funds from wealthy individuals.

As of January 12, 2022, the owner of the ONEXIM group Mikhail Prokhorov (57.61%) acted as its main shareholder. More than a third of the shares of the IFC (35.84%) were controlled by Tatiana Orlova, the former owner of Vozrozhdeniye Bank and the daughter of banker Dmitry Orlov. Another 6.55% stake in the bank belonged to Ekaterina Ignatova, wife of Rostec CEO Sergei Chemezov. In March 2022, due to sanctions imposed by Western countries in response to Russia's military operation in Ukraine, the Central Bank withdrew information about the owners of all credit institutions from its website and allowed market participants not to publish reporting under Russian standards.

Why IFC's rating was downgraded

Analysts of "Expert RA" name three factors that led to the deterioration of the bank's rating.

Liquidity problems

As noted in the press release of "Expert RA", in March, the IFC bank experienced difficulties with liquidity. He was forced to increase more expensive short-term borrowings to the Central Bank secured by securities and temporarily violated some standards. Thus, the H2 instant liquidity ratio (regulates the risk of a bank losing solvency within one day) was not observed by the IFC for four days, that is, it was below the minimum of 15%. The bank managed to stabilize the stock of instant liquidity, but subsequently experienced "an outflow of term liabilities in foreign currency," the report said.

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Russians withdrew almost $10 billion worth of foreign currency from banks in March

The amount of the outflow of client funds is not given, however, Expert RA analysts noted "the appearance in March 2022 of large payments in favor of VIP depositors." The agency pointed to the IFC's "vulnerable funding profile" in general. As of March 1, the ten largest clients accounted for 56% of the organization's liabilities. About 80% of the bank's retail liabilities are concentrated in about 100 accounts of individuals and individual entrepreneurs with balances over 20 million rubles.

“The implementation of a potential large payout in the future may lead to additional pressure on the bank’s liquidity,” Expert RA warns, noting that more than 70% of customer funds are foreign currency balances, and about a third of the bank’s total liabilities are non-residents’ money.

The IFC may experience problems with the fulfillment of foreign exchange obligations due to capital restrictions imposed in Russia due to sanctions, Expert RA believes. “The bank did not comment to the agency on plans to restructure foreign currency debt to non-residents and the magnitude of a possible outflow in the event of easing currency control measures in the Russian Federation,” Expert RA emphasizes. But its analysts note that by April 1, the IFC managed to partially restore key liquidity indicators (H2 increased to 38%, and the current liquidity ratio H3 after leaving below 57% with the minimum allowable level of 50% rose to 66%).

After the start of Russia's military operation in Ukraine on February 24, Russian banks faced increased customer demand for cash rubles and foreign currency, and also experienced an outflow of deposits. According to the statistics of the Central Bank, the amount of cash in circulation on February 24 jumped by 111.3 billion rubles, and by February 25 it increased by another 1.4 trillion rubles. In February, the outflow of household funds from banks amounted to 1.2 trillion rubles, in March it decreased in ruble terms, but the outflow of foreign currency continued.

The volume of cash in Russia in February grew the most in 20 years

Losses due to revaluation of securities

According to Expert RA, about 50% of IFC Bank's assets are securities in foreign currency. The real value of the entire portfolio of securities was 257% of the bank's capital as of March 1, or 19.8 billion rubles, but it "decreased significantly" by April. On February 22, the Central Bank temporarily allowed Russian banks not to record losses from negative revaluation of securities. According to Expert RA analysts, the IFC took advantage of the relaxation, otherwise the losses would have had a “critical impact on capital”.

The pressure on the IFC's capital ratios still proved to be tangible: as of March 1, the bank's own funds adequacy ratio (N1.0) fell to 9.6%, which is less than the required level with surcharges (10.5%). The core capital adequacy ratio (N1.1) was 6.5% against the target with 7% markups. The decrease in the indicators of the IFC Expert RA is associated, among other things, with losses from the revaluation of securities. Analysts note that by April the bank managed to restore the standards, but its ability to absorb potential losses is still "insufficient" to cover all the risks on securities and problem loans.

Experts assessed the need of Russian banks for additional capitalization Finance

Ownership value is declining

Another factor that influenced the deterioration of the IFC rating is methodological. "Expert RA" has changed its assessment of the importance of supporting banks by individual owners: this factor is no longer taken into account when determining ratings, due to the emergence of "additional restrictions on the movement of capital." Since March, the Bank of Russia has introduced a number of bans on the withdrawal of funds abroad, payments in favor of non-residents, as well as non-residents' operations with securities.

The decrease in IFC capital adequacy ratios was largely due to the technical features of accounting, explained Ivan Uklein, DIRECTOR of banking ratings at the Expert RA agency. “From the point of view of economic content, the level of capital adequacy of the bank has not changed as much as it was reflected in the statements as of March 1,” he said.

Uklein also stressed that prior to the crisis, the currency structure of assets and liabilities of IFC Bank "was balanced." “Currently, there is no complete certainty regarding the real duration and real value of investments in Eurobonds of all Russian banks, as well as regarding the procedures for redeeming coupons and the debt body in rubles,” the expert said.

How the situation is assessed in the bank itself

There is no decrease in key indicators, Yulia Gorbacheva, financial director of the International Financial Club, told RBC, stressing that capital and liquidity ratios have recovered.

“The bank had single payments in favor of VIP depositors, but the reduction in the passive base did not happen - it was offset by the receipt of funds from legal entities,” she explained. The IFC also does not expect that the easing of currency control by the Central Bank may lead to an outflow of borrowed funds.

Risk factors for IFC are not unique

After the start of the military operation in Ukraine, foreign rating agencies - Fitch, Moody's and S&P - downgraded and then withdrew all the ratings of Russian banks assigned by them: the EU imposed sanctions prohibiting them from rating Russian issuers. National agencies, on the other hand, practically did not worsen the ratings.

Thus, since February 24, ACRA has announced rating actions in relation to 13 credit institutions: only three of them - Sovcombank, Rosbank and SME Bank - had their ratings sent for review with a "developing" outlook.

Valery Piven, Senior Director of the Financial Institutions Ratings Group of ACRA, did not answer RBC's question about whether the agency expects a large-scale deterioration in bank ratings. He only clarified that now the analysis of “changes in the quality of assets and its impact on the profitability and capitalization of banks” is most important for the assessment.

After February 24, the NKR Agency reported on the confirmation of the ratings of three banks. The agency declined to comment. The NRA did not carry out rating actions with credit institutions after the start of the military operation in Ukraine.

Uklein believes that the key credit risks for many banks will be concentrated around the same underlying factors. “First of all, this is liquidity, which came under pressure due to both outflows of client funds and asset impairment,” he says. The negative revaluation of securities and the growth of default loans, he said, will also hit the profitability and operational efficiency of banks.