The 'B++' rating indicates that Kuznetsky Bank Public JSC qualifies as a sufficiently creditworthy borrower. The risk of a delay in meeting obligations is moderately low, the full or partial debt restructuring risk is insignificant. The rating assignment was based on the Credit Rating Methodology for Banks and their Debt Instruments rev. February 26, 2016.

Kuznetsky Bank Public JSC headquartered in Penza city has a network of departments in Penza region, the Chuvash Republic and in Samara city. Kuznetsky Bank Public JSC provides a whole range of banking products and services to legal entities and private clients in Russian rubles, forex transactions for legal entities and foreign currency-denominated money transfers for individuals.

The Bank qualifies as a medium-sized Russian credit institution in terms of the amount of business. Kuznetsky Bank's position in the Russian market of banking services can be regarded as stable. As of June 1, 2016, the Bank was in the 300-400 and 400-500 ranges of the Russian banks in terms of assets, equity capital and the amount of net profit earned.

The Bank's credit rating is essentially supported by improvements in the key balance sheet indicators, a steadily high N1.0 ratio, profitable operations, overdue debt reduction, a considerable share of highly liquid assets and a favorable income profile.

We appreciate current improvements in the Bank's key balance sheet indicators. Over the period from April 1, 2015 to May 1, 2016, the Bank's assets grew by 15.6% to reach RUB 4,344.8 million, liabilities increased by 18.6% to RUB 3,856.1 million. It should be noted that the share of resource investment items directly influencing the Bank's earnings in the structure of assets has increased. The Bank's net loans receivable and securities portfolio increased by RUB 324.6 million and RUB 129.7 million for the same period, respectively.

While expanding its asset-side transactions, Kuznetsky Bank Public JSC has also achieved a stable and comfortable capital adequacy ratio, with low volatility and appreciable remoteness from the threshold set by the regulatory authority (12.7% on average in 2014-2015). The current CAR ratio of more than 11% indicates the credit institution's good ability to neutralize possible financial losses.

We are pleased to note the Bank's ability to remain profitable. Kuznetsky Bank Public JSC posted positive financial results in the vast majority of quarterly periods in 2014-2015. In the first quarter of 2016, the Bank improved its net profit by 15% against the same period in 2015.

While the Bank's loans receivable increased, the level of overdue loans remained relatively stable. As a result, the share of assets with overdue payments decreased by 1.2 p.p. to 6.8% in the past period. The breakdown by maturity indicates a good payment discipline of the rated Bank's borrowers, with a low percentage of assets up to 30 days in arrears (0.6%).

Seeing as the credit institution focuses on retail lending, the fairly high level of its highly liquid assets should be regarded as a positive rating driver. In 2015-2016, the average percentage of highly liquid assets stayed above 10%, with an upward trend, which can offset risk factors should external factors turn adverse.

The credit institution's net incomes are mainly imposed of interest, fee & commission incomes. The insignificant percentage of speculative incomes and the absence of notable losses from them make the Bank independent of exchange rate fluctuations and security prices. The predominance of interest incomes is an evidence of the Bank's high competitive power and its activity in the market of banking services.

At the same time, a negative trend in the loans of quality grade 5 and low diversification of funding sources are working against the Bank's rating.

Our review of the Bank's loan portfolio quality has shown a notable growth of non-performing loans. The share of NPLs in the Bank's loan book increased to 8.3%, while provisions for possible loan losses did not increase adequately, resulting in an imbalance between provisions for losses and NPLs (7.8%), an evidence of the Bank's insufficiently conservative loan provisioning policy.

The extremely high share of payables to customers in the structure of liabilities (97.8%) and the dominance of retail clients in the structure of borrowings (69.3%) are indicative of low diversification of funding sources and increase the credit institution's liquidity risks.

Full name: Kuznetsky Bank Public joint stock company.

Short name: Kuznetsky Bank Public JSC.

Kuznetsky Bank Open Joint-Stock Company (CBR license no. 609) has been operating in the market of banking services since 1990. The Bank possesses banking license 609 granted by the Central Bank of the Russian Federation on September 17, 2015.

AK&M Rating Agency assigned a credit rating to Kuznetsky Bank Public JSC for the first time on June 30, 2011. The last rating action in relation to the Bank was taken on June 25, 2015. All rating action announcements are available on the akmrating.ru website.

The rating is valid until July 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the Bank's creditworthiness are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the Bank. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

This press release is based on the Statement of assignment of a credit rating to Kuznetsky Bank Public JSC.

The rating, along with any information and conclusions provided in this press release, only conveys our creditworthiness opinion and shall not be construed as a recommendation to purchase or sell securities, or to lend funds.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

AK&M Rating Agency

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www.akmrating.ru

Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.