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

The credit rating assigned to SBI Bank LLC (hereinafter, SBI Bank, or the Bank) reflects the high likelihood of extraordinary support from the Supporting Organization with a fairly high creditworthiness. SBI Bank’s standalone creditworthiness assessment (SCA) is based on adequate capital adequacy, a weak risk profile, adequate funding and liquidity, and a medium business profile.

SBI Bank is a small Moscow-based bank that ranked 158th in terms of assets and 137th in terms of equity among Russian banks as of May 1, 2020. Since 2017, SBI Holdings, Inc. (hereinafter, the Supporting Organization, or the SO) has been the sole owner of the Bank, with a 100% share in its charter capital. SBI Holdings, Inc. is a Japanese financial holding focused on the provision of financial services, including brokerage, banking and investment, asset management services, etc. via the internet.

Key rating assessment factors

High likelihood of extraordinary support from the SO. ACRA is of the opinion that, if necessary, SBI Holdings, Inc. will provide SBI Bank with short-term and long-term funding and capital injections, taking into account the following:

  • Possible reputational risks the SO may face if the Bank defaults;
  • The degree of the legal relationship between the SO and the Bank and the SO’s ability to control the Bank’s operations;
  • The fact that in 2017, 2018, and 2019, the SO granted a subordinated loan to the Bank (which was subsequently converted into its Tier-1 capital) and increased the size of the Bank’s capital.

The degree of integration between the Bank and the SO has been increased to strong, taking into account extraordinary and operational support that is regularly provided to the Bank and the SO’s plans to further increase the size of the Bank’s capital. ACRA assesses the country risk of the SO’s jurisdiction (Japan) against the country risk of Russia as strong. The SO’s creditworthiness is determined by ACRA as neutral. In view of the above factors, and also support from the SO, the Bank’s SCA (bb-) is adjusted three notches upward.

The business profile assessment is determined by the combination of SBI Bank’s low share in the Russian banking market, its transparent ownership structure and acceptable management quality. In addition, ACRA takes into account the effects of the ongoing transformation (in connection with adapting the new business model and the need to assess the results of its implementation) on the assessment of the business profile sub-factors and as part of a comparative analysis.

The strategy, which was approved in 2018, envisaged building a universal bank that would provide hi-tech lending and comprehensive banking services to the SME segment and retail clients (with an emphasis on specific niches). The strategy implied active growth in the volume of lending activities and the client base in the above areas.

The Bank has adjusted its key strategic tasks to take into account negative economic trends: now the focus is on increasing lending to major corporate clients, while the objective of achieving active growth of the retail segment has been postponed.

The high loss absorption capacity has been sustained in view of capital injections performed by the SO. The Bank maintains capital adequacy ratios with a margin: as of May 1, 2020, the N1.2 ratio was 17.4%. This is considerably lower than the indicator for the same period last year (33.6%) due to the active growth of lending operations and guarantee business.

ACRA’s stress test confirms that the Bank is able to absorb credit risks in the next 12–18 months (with the cost of risk increasing by over 500 bps without breaching regulatory ratios) and takes into account SBI Bank’s planned increase of its loan portfolio. However, ACRA’s assessment shows that the Bank may require additional capital injections in order to support its development plans and maintain a significant loss absorption buffer.

The Bank’s capital generation capacity over the last five years remains low. At the same time, ACRA notes that this is largely related to losses generated by creating reserves for loans that were provided to the Bank prior to the change in ownership structure, and also in connection with the investment stage of implementing the new business model.

SBI Bank’s operational efficiency is a negative rating factor. This is due to the cost-to-income (CTI) ratio that has been consistently high over the last three years, which in turn is due to an increase in operating expenses as part of the strategy implementation. However, it is noteworthy that this indicator is currently improving.

The downgrade of the risk profile assessment to weak reflects the significant increase of the Bank’s loan portfolio, in terms of both absolute volume (practically by 3x from April 1, 2019 to April 1, 2020) and from the point of view of its share in assets (more than 70%). In connection with this, ACRA does not rule out the possibility of the Bank’s strategy to boost its lending activities combined with the deterioration of the economic situation putting additional pressure on the risk profile assessment. The share of problem assets in the portfolio amounts to almost 20%, which is explained by the presence of problem loans on SBI Bank’s balance sheet, which were issued in the interest of its previous beneficiary. ACRA positively assesses the fact that these problem loans are practically 100% covered by provisions. The portfolios of loans and guarantees built as part of the Bank’s new strategy exhibit acceptable credit quality, according to ACRA’s assessment. ACRA assesses SBI Bank’s risk management system as satisfactory.

The Funding and liquidity factor is assessed as adequate. As of April 1, 2020, the Bank demonstrated a significant surplus of short-term liquidity in ACRA’s base case and stress scenarios. The long-term liquidity shortage indicator (LTLSI) calculated by ACRA has declined compared to the previous year, and amounted to less than 100%. However, it is still assessed as strong.

SBI Bank’s core funding sources are deposits and funds in accounts opened by corporates and individuals. However, the Bank’s funding strategy envisages growth in the volume of funds provided by the SO and increasing the volume of long-term interbank loans.

The concentration on funds from the largest lenders is elevated: as of April 1, 2020, the share of the largest lender was 18%, while the 10 largest lenders accounted for 36% of liabilities.

Key assumptions

  • SBI Holdings, Inc. retaining its shareholder and operational control over the Bank;
  • N1.2 CAR at no lower than 14% in the next 12–18 months;
  • Maintaining the current development model approved by the SO.

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 operational efficiency amid consistently high capital adequacy indicators;
  • Decreased problem debt in the loan portfolio coupled with a reduction of its concentration.

A negative rating action may be prompted by:

  • A decline in the SO’s propensity to do business in Russia and change in the ownership structure of the Bank;
  • An aggressively expanding loan portfolio combined with a possible worsening of the quality of the portfolio;
  • A decline in the Bank’s capital adequacy ratios;
  • Deteriorating liquidity.

Rating components

SCA: bb-.

Adjustments: none.

Support: SCA + 3 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 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 Registered Outside 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 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 dated October 8, 2018. The credit rating is solicited, and SBI Bank LLC participated in its assignment.

No material discrepancies between the provided data 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.

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