The 'A' rating indicates that CB OBRAZOVANIE qualifies as a highly creditworthy borrower. The risk of a failure to meet obligations in time is low, the full or partial debt restructuring risk is minimal. The rating assignment was based on the Credit Rating Methodology for Banks and their Debt Instruments rev. February 25, 2016.

Headquartered in Moscow, Commercial Bank OBRAZOVANIE has a regional network comprising 10 branches, 39 satellite and operational offices and one stand-alone cash desk located in six federal districts of Russia. The Bank provides the whole range of banking products and services involving Russian rubles and foreign currencies to legal entities and private customers.

Commercial Bank OBRAZOVANIE is a large Russian credit institution in terms of the amount of business. As of August 1, 2016, the Bank was among the top 100 Russian banks in terms of assets and equity capital ranking 90th and 98th, respectively.

The loan portfolio impairments, unprofitable operations, persisting dependence on speculative earnings and a thinner cushion of liquid assets exert downward pressure on the Bank's credit rating.

The loan portfolio quality was impaired due to a notable growth of loans of quality grade 3, as our analysis shows. Over the period from July 1, 2015 to August 1, 2016, the share of these loans in the Bank's loan portfolio increased to 38.2% being the main growth driver of loan provisions (+174%). Problem and non-performing loans, while being relatively low, also increased by 1.7 p.p. The weaker loan portfolio has put serious pressure on the Bank's financial performance.

The growing provisions in the second quarter of 2016 naturally resulted in a heavy loss amounting to RUB 511 million and exceeding the profit earned in the first quarter. The ensuing negative 6-month financial result (RUB -315 million) is not the final price paid by the Bank, seeing as the continuing growth of provisions in July 2016 will put certain pressure on the Bank's financial performance in the third quarter.

Since our previous review in 2015, the share of highly liquid assets of the credit institution decreased steadily decreased from more than 20% as of July 1, 2015 to 9% on July 1, 2016. While the percentage of highly liquid assets remains at an acceptable level, this impairment – given the high share of personal deposits (nearly 50%) produces a negative impression.  

Net incomes of the credit institution strongly depend on speculative gains. Incomes from forex transactions exceed fee & commission incomes and remain the second biggest contributor to the aggregate result. Besides, the notable share of investments in securities (ca. 16%) indicates considerable potential dependence of the Bank's incomes on the current environment in this market.

The key positive rating drivers for the Bank include growing key balance sheet metrics, low debt arrears, high provisions and lower concentration of borrowings within the group of major creditors.

The Bank improved its key balance sheet metrics in the period under review. Assets and liabilities increased by 10.7% and 9.8%, respectively. Of particular note is the outstripping growth of earning assets, their share in total assets increasing to 87%, which enabled the Bank to increase its interest incomes, despite a considerable increase in loans of quality grade 3.

We appreciate the quality of debt servicing by the Bank's clients. As of August 1, 2016, the share of assets in arrears did not exceed 3.5% (2.2 p.p. below the average level in the banking sector of Russia). It should be noted that the loan arrears are dominated by loans with payment delays up to 30 days, which implies a possibility of further reduction in overdue loans.

The total level of provisions for possible losses (11.1%) is considerably above both the share of assets in arrears and the total percentage of problem and non-performing loans (3.9%). As of August 1, 2016, the credit institution's provisions for non-performing loans reached 89.7%, which is close to the upper limit of the target range of provisions for such loans and enables the Bank to offset the negative effect of writing off the loan losses.

Another positive signal is the lower concentration of borrowings within the group of major creditors. As of July 1, 2015, the maximum share of borrowings attributable to one depositor was 15.9%, while 10 biggest depositors (groups of depositors) accounted for ca. 32.6% of the credit institution's total liabilities. This year, the concentration of borrowings within major creditors was on a downward trend reaching 9.8% and 19.9%, respectively, as of August 1, 2016.

Full Bank name: Commercial Bank OBRAZOVANIE.

Commercial Bank OBRAZOVANIE has been operating in the market of banking services since 1990. The Bank possesses general banking license no. 1151 as of December 10, 2014 issued by the Central Bank of the Russian Federation. The Bank is a member of the deposit insurance system, reg. no. 939 as of November 28, 2005.

AK&M Rating Agency assigned a credit rating to Commercial Bank OBRAZOVANIE for the first time on October 9, 2009. The last rating action in relation to the Bank was taken on July 28, 2015. All rating action announcements are available on the akmrating.ru website.

The rating is valid until August 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 Rated Entity. 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 Commercial Bank OBRAZOVANIE.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the Bank's creditworthiness 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.

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