Training on sovereign risk credit analysis, October 24

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

The credit rating assigned to SBI Bank LLC (the Bank) reflects high likelihood of extraordinary support from its parent entity with a fairly 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 198th in terms of assets and 133rd in terms of equity among Russian banks as of June 01, 2019. 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 internet-enabled financial services including brokerage, banking and investment, asset management services, 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, 2018, and 2019, 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 neutral. In view of the above, the Bank's SCA (bb) is adjusted two notches up.

Business profile assessment is determined by 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 the ongoing transformation (changes in the Bank’s ownership structure and business model) on assessment of its strategy and operating income diversification.

According to the development strategy approved in 2018, the Bank will focus on providing high-tech lending and comprehensive banking services to the SME segment and retail clients with the emphasis on specific niches. The strategy also implies the increase of lending activities in volume and client base in the above niches. However, whether this strategy is efficient can only be assessed retrospectively after its implementation.

Sustaining high loss absorption capacity in view of capital injections by the Supporting Organization. The Bank maintains high capital adequacy ratios (as of June 01, 2018, N1.2 ratio was 29.23%). ACRA stress test confirms the stable ability of the Bank to absorb credit risks in the next 12–18 months (cost of risk has increased by over 500 bps without breaching regulatory ratios) and takes into account the planned increase of the loan portfolio.

The Bank’s capital generation capacity over the last five years remains low. At the same time, the Agency understands that this is largely related to the high risk lending policy the Bank has been pursuing prior to changes in its ownership structure and expects improvements of the Bank’s capital generation capacity in the long term.

The Bank's operating efficiency constitutes a negative rating factor driven by its cost-to-income (CTI) ratio that has been consistently high over the last three years caused by increase in operating expenses as part of the above strategy implementation.

Satisfactory business profile assessment reflects that a substantial share of the Bank’s loan portfolio is represented by problem loans issued in the interest of the previous beneficiary; these loans, however, have a 100% coverage by loan loss provisions. The portfolios of loans and guarantees built as part of the new strategy exhibit acceptable credit quality, according to ACRA assessment. The Bank’s plans to boost its lending activities in the next 12-18 months may put pressure on the risk profile assessment if risk control is not conservative enough. As of April 1, 2019, deposits with the Central Bank of Russia represented around 30% of the Bank’s net assets.

The Bank has a significant amount of non-core assets (land plots) on its balance sheet, which it received as compensation for non-repaid loans net total of which is around 16% of the core capital.

The risk management system of the Bank is assessed by the Agency as satisfactory.

Funding and liquidity: adequate. As of April 01, 2019, 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 exceeded 100%, which is assessed as strong.

The Bank's core funding sources are deposits and accounts opened by corporates and individuals. The concentration on funds from the largest lenders is moderate: as of April 01, 2019, the share of the largest lender was 12.1%, while top 10 lenders accounted for 43.4% of liabilities).

If needed, 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 below 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 a stronger franchise;
  • Higher strategic importance of the Bank for SBI Holdings, Inc.;
  • Higher CTI amid stably high quality of the loan portfolio and other assets.

A negative rating action may be prompted by:

  • A decline in the Supporting Organization's propensity to do business in Russia and change in the ownership structure of the Bank;
  • An aggressively expanding loan portfolio combined with 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 assigned to SBI Bank LLC was first published on July 11, 2018. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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. 4927-U of October 8, 2018. 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 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. The Agency adjusted the amount of problem loans by taking into account the issuance specifics of a part of them prior to changes in the Bank’s ownership structure.

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