ACRA assigns BВB+(RU) to SDM-Bank PJSC, outlook Stable

The credit rating of SDM-Bank PJSC (hereinafter – SDM-Bank or the Bank) is based on its limited market position, strong capital adequacy, satisfactory risk profile, and adequate liquidity and funding position. The Bank’s creditworthiness is stable; however, ACRA believes that the credit institution may be sensitive to adverse economic climate and industry-specific factors in the Russian Federation.

SDM-Bank is a credit institution that mainly operates in the Moscow Region, but as the same time has a number of large customers in other Russian regions. The Bank focuses on lending to corporate customers; however, its loan portfolio is marked by a relatively high industry diversification. Anatoly Landsman is simultaneously the Bank’s controlling shareholder, with 67% of shares, and the Chairman of the Board of Directors.

Key rating assessment factors

Satisfactory assessment of business profile is determined by the Bank’s limited market share on both, federal and regional levels. Nationwide, SDM-Bank ranks 92nd by own capital, and 87th by assets. The Bank’s strategy assumes a limited growth of its business scale while maintaining a conservative approach to lending activities. Due to the Bank’s stable capability to generate income without significant growth of risk, its strategy quality may be assessed as adequate. SDM-Bank’s corporate governance system corresponds to the scale and areas of Bank’s business. The existing ownership structure of the Bank is transparent. SDM-Bank’s business profile assessment is also defined by a relatively high diversification of its operating income due to a significant amount of commission income.

Strong capability of the Bank to absorb potential losses is primarily determined by its capital adequacy (Tier-1 amounted to 18.6% as of December 31, 2016, N1.2 amounted to 12.7% as of May 1, 2017). At the same time,      SDM-Bank has demonstrated high operating profitability over the last 5 years (averaged capital generation ratio, ACGR, equaled to 243 bps) due to both, sound net interest margin (in 2014–2016, NIM stood at 6%), and low cost of credit risk. The Bank is sustainable to occurrence of sizeable unexpected losses: its core capital indicators under regulatory norms and Basel standards will fall below 6% only in case of an additional cost of risk surge well above 500 bps. In 2016, SDM-Bank started paying dividends, but, on ACRA’s opinion, Bank’s dividend policy will be moderate and will not exert a negative influence on capital adequacy within the 12 to 18-month horizon. 

Satisfactory risk profile assessment is based on the adequate risk management system and the acceptable credit portfolio quality, on the one side, and slightly increased market risk accepted (above 100% of Tier 1 capital), on the other. The share of bad assets, taking into account certain loans earmarked by the Agency as “potentially bad,” is about 13.7% of the portfolio (including 1.5% NPL90+). Moreover, in 2016 the Bank’s loan portfolio was not more than 30% of the assets, which lowers the relevance of credit risk for the Bank’s financial stability. ACRA notes that the Bank sets limits for loans issued to companies operating in high-risk industries (including building industry, etc.) and maintains a low level of loans to related parties.

The risk profile assessment is affected by a high concentration of loans issued to ten groups of major borrowers (over 30% of loan portfolio).

ACRA is of the opinion that the quality of Bank’s risk management system is adequate. ACRA notes the ability of the Bank management to maintain a conservative financial profile and a high KYC level. In addition, ACRA underlines that risk managers have powers to materially influence management decisions taken by the Bank.

Adequate liquidity and funding position is underpinned by the strong liquidity position. ACRA estimates that, thanks to the available cash and unencumbered high credit quality securities, the Bank has vast excessive current liquidity under the baseline scenario in respect of the short-term liquidity shortage indicator (STLSI). Under the stress scenario, the indicator will not drop below 20%. ACRA also sees no imbalances for longer periods, as the long-term liquidity shortage indicator (LTLSI) exceeds 100%).

In ACRA’s opinion, the Bank’s funding structure is balanced, but the funding quality assessment is affected by a heavy dependence on the largest source of obligations, as the individuals’ share of liabilities is over 60%. The concentration of funds raised from the largest lenders/depositors is acceptable. The Bank does not used to resort to injections of funds from the regulator.

Key assumptions

  • Adhering to the current business model within the 12 to 18-month horizon;
  • Loan portfolio growth rate under 10% in 2017;
  • Cost of credit risk within 2%;
  • Tier-1 capital adequacy (N1.2) not above 10% within the 12 to 18-month horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Decrease of loan portfolio concentration on 10 largest borrowers;
  • Resource base diversification.

A negative rating action may be prompted by:

  • Deviation from the implemented business model;
  • Decline of loan portfolio quality;
  • Deterioration of liquidity position.

Rating components

Standalone creditworthiness assessment (SCA): bbb+.

Adjustments: none.

Support: systemic importance is absent.

Issue ratings

The Bank has no debt securities in free float.

Regulatory disclosure

The credit rating has been assigned under the national scale for the Russian Federation and is based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.

A credit rating has been assigned to SDM-Bank PJSC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (June 15, 2017).

The assigned credit rating is based on the data provided by SDM-Bank PJSC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of SDM-Bank PJSC and statements of SDM-Bank PJSC composed in compliance with the Bank of Russia Ordinance No. 4212-U dated November 24, 2016. The credit rating is solicited, and SDM-Bank PJSC participated in its assignment.

No material discrepancies between the provided data and the data officially disclosed by SDM-Bank PJSC in its financial statements have been discovered.

ACRA provided no additional services to SDM-Bank PJSC. No conflicts of interest were discovered in the course of credit rating assignment.

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