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

The credit rating of SDM-Bank PJSC (the Bank) is based on satisfactory assessments of business and risk profiles. In our opinion, thanks to its high profitability and common capital adequacy ratios, the Bank is able to absorb substantial potential losses amid deteriorating quality of its loan portfolio. The Bank also holds strong liquidity positions, while its resource base concentration is moderately high.

Key rating assessment factors

Business profile assessment has remained satisfactory (bbb-) because of the stably transparent ownership structure and stable quality of corporate governance. The Bank has continued to maintain high diversification of operational income based on, in particular, a significant share of fees in the total revenues (22.4% as of December 31, 2017). The business profile assessment is limited by relatively low shares occupied by the Bank at the federal and regional markets. The Bank ranks 97th by equity and 96th by assets among Russian banks. The Bank's lines of business are well established and include lending and other financial services to SMEs.

Strong capability of the Bank to absorb potential losses is primarily determined by its capital adequacy ratios (N1.2 = 14.3% as of May 1, 2018). The Bank has demonstrated high operational profitability over the last 5 years (averaged capital generation ratio, ACGR, equaled to 214 bps). Thanks to its substantial loss absorption buffer, high profitability and low current costs of credit risk, the Bank is able to withstand sizeable unexpected losses: its common capital adequacy ratio will not fall below 6% unless the cost of risk surges well above 500 bps.

Satisfactory risk profile assessment is based on the Bank's adequate risk management function and high quality of assets outside the loan portfolio, on the one hand, and heightened concentration of the loan portfolio and the 16.5% share of problem and potentially problem loans, on the other. The share of top 10 borrowers exceeds 30% of the portfolio. ACRA notes that the share of NPL90+ was 2.7% as of May 01, 2018 (vs 1.5% as of December 31, 2016). Most problem and potentially problem loans are secured by pledge of real estate property. As of May 01, 2018, the Bank’s loan portfolio was less than 30% of the assets, which lowers the relevance of credit risk for the Bank’s financial stability. Most assets of the Bank are funds held with the CBR and the portfolio of securities dominated by sovereign bonds of the Russian Federation and corporate debt instruments of high credit quality. The volume of securities exceeds 40% of the Bank's assets, which elevates the market risk above 100% of the common capital, according to ACRA estimates.

Liquidity factor is assessed as strong. Thanks to a substantial amount of cash and unencumbered high credit quality securities, the Bank has vast excessive current liquidity under the base case scenario in respect of the short-term liquidity shortage indicator (STLSI). Under the stress scenario, the indicator will not drop below 40%. ACRA also sees no imbalances for longer periods, as the long-term liquidity shortage indicator (LTLSI) exceeds 100%.

Heightened dependence on the largest source of funds (the share of retail funds in the Bank's liabilities is over 60%) limits the funding factor assessment. The concentration of funds raised from the largest lenders/depositors has remained acceptable.

Key assumptions

  • The Bank will adhere to the current business model in the next 12–18 months;
  • Loan portfolio growth rate will be below 20% in 2018;
  • Cost of credit risk will be within 3%;
  • N1.2 CAR will be higher than 10% in the next 12–18 months.

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 the top 10 borrowers;
  • Better quality of the loan portfolio;
  • Higher resource base diversification.

A negative rating action may be prompted by:

  • Deviation from the current business model;
  • Further decline of loan portfolio quality;
  • Better quality of assets outside the loan portfolio;
  • Deteriorating 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.

The credit rating assigned to SDM-Bank PJSC was first published on June 19, 2017. The credit rating and its outlook are expected to be revised within one year following the rating action date (June 15, 2018).

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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