Training on sovereign risk credit analysis, October 24

ACRA assigns BBB-(RU) to SBI Bank LLC, outlook Stable

The credit rating assigned to SBI Bank LLC (the Bank) reflects very high likelihood of extraordinary support from its parent entity with a high creditworthiness. The Bank’s standalone creditworthiness assessment (SCA) is based on adequate capital adequacy, neutral risk profile, adequate funding and liquidity, and medium business profile.

The Bank (formerly YAR Bank LLC) is a small Moscow bank that ranked 171st in terms of assets and 239th in terms of equity among Russian banks as of June 01, 2018. In 2017, SBI Holdings, Inc. (the Supporting Organization) became the sole owner of the Bank. SBI Holdings, Inc. is a Japanese financial holding focused on IT-based financial services, including brokerage, banking and investment business, asset management, etc.

Key rating assessment factors

Fairly high likelihood of extraordinary support from the key shareholder. ACRA is of the opinion that, in case of need, the Supporting Organization will provide the Bank with short-term and long-term funding and capital injections, taking into account the following:

  • Possible reputational risks the Supporting Organization may face in case the Bank defaults;
  • The degree of legal relationships between the Supporting Organization and the Bank; the Supporting Organization's ability to control the Bank's operations;
  • In 2017 and 2018, the Supporting Organization granted a subordinated loan to, and injected capital into, the Bank.

The degree of integration between the Bank and its key shareholder is assessed as moderate. ACRA assesses the country risk of the Supporting Organization's jurisdiction (Japan) against the country risk of Russia as strong. The Supporting Organization's creditworthiness is determined by ACRA as moderately strong. In view of the above, the Bank's SCA (bb) is adjusted two notches up.

Business profile assessment: medium, which is a result of the combination of the Bank's low share in the Russian banking market, transparent ownership structure and acceptable management quality. In addition, ACRA takes into account the effects of a major transformation (changing ownership structure) the Bank currently in on its strategy and operating income diversification.

According to the new strategy, the Bank will provide high-tech lending and general banking services to SMEs and retail clients, with a focus on certain client niches. The strategy also includes an active growth in the volume of loans and the client base and formation of a branch network. The efficiency of such strategy may be fully assessed in the future, after it is implemented.

Loss absorption capacity: high. The Bank maintains high capital adequacy ratios (as of June 01, 2018, N1.2 ratio was 35.07%). ACRA stress tests confirms the stable ability of the Bank to absorb credit risks in the next 12–18 months, including current recapitalization procedures and expected increase of the loan portfolio.

The Agency assesses the capital generation capacity over the last five years as low, which is connected with the high risk lending policy the Bank has pursued prior to changes in its ownership structure; such assessment also takes into account positive financial result the Bank may demonstrate in the long term.

Another negative rating factor is the Bank's cost to income (CTI) that has been consistently high over the last three years, which is caused by, among others, declining operating income.

Business profile assessment: satisfactory. Almost entire loan portfolio of the Bank is represented by loans issued to the previous beneficiary, and today, such loans are categorized as problem loans and 100% reserved by the Bank.

The risk profile assessment is neutral, taking into account that, as of June 01, 2018, the active operations of the Bank mainly included investments of own and attracted funds into deposits with the Central Bank (about 72% of the Bank's net assets) and securities issued by issuers with high creditworthiness. At the same time, the risk profile assessment may be affected by a significant increase in the volume of corporate loans and the portfolio of bank guarantees provided for in the Bank's strategy for the next 12–18 months.

The Bank's balance sheet contains a significant amount of non-core assets (land plots) received as compensation for non-repaid loans, which is negative for the Bank's risk profile.

The risk management system of the Bank has undergone no changes in the last year, and it is assessed by the Agency as satisfactory.

Funding and liquidity: adequate. As of April 01, 2018, the Bank demonstrated a significant surplus of short-term liquidity in both base case and stress scenarios of ACRA. The long-term liquidity shortage indicator (LTLSI) calculated by ACRA equaled to about 77%, which is assessed as adequate.

The Bank's funding source mainly includes deposits and accounts opened by corporates and individuals. The concentration on funds from the largest lenders is moderate: as of April 01, 2018, the share of the largest lender (excluding the subordinated loan) / top 10 lenders was 8.8% / 29% of liabilities).

In case of need, the Supporting Organization may provide the Bank with additional funds.

Key assumptions

  • SBI Holdings, Inc. will retain its shareholding and operating control over the Bank;
  • N1.2 CAR will not be lower than 14% in the next 12–18 months;
  • The Bank will follow the current business model approved by the Supporting Organization.

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:

  • Effective implementation of the new strategy in the long term, coupled with higher diversification of operating income and stronger franchise;
  • Higher CTI amid stably high quality of the loan portfolio and other assets;
  • Lower volume of non-core assets on the Bank's balance sheet.

A negative rating action may be prompted by:

  • A decline in the Supporting Organization's propensity to support the Bank or a change in the ownership structure of the Bank;
  • An aggressively expanding loan portfolio and a significant increase in the cost of risk caused by the low quality of loan portfolio so expanded;
  • A substantial decline in the Bank’s capital adequacy ratios;
  • Deteriorating liquidity.

Rating components

SCA: bb.

Adjustments: none.

Support: SCA +2 notches.

Issue ratings

No outstanding issues have been rated.

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, the Methodology for Analyzing Relationships Between Rated Entities and Supporting Organizations outside the Russian Federation, and the Key Concepts Used by Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating has been assigned to SBI Bank LLC for the first time. The credit rating and its outlook are expected to be revised within one year following the rating action date (July 09, 2018).

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

No material discrepancies between the provided information and the data officially disclosed by SBI Bank LLC in its financial statements have been discovered.

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

Disclosure of deviations from the approved methodology. When calculating the average capital generation ratio (ACGR), the Agency took into account the specifics of the financial result demonstrated by the Bank prior to changes in its ownership structure, and therefore the assessment of the Bank's ability to generate capital was equated to zero.

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