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

The credit rating of SDM-Bank PJSC (hereinafter, the Bank) is based on satisfactory business and risk profile assessments. In ACRA’s opinion, due to its high profitability and common capital adequacy ratios, the Bank is able to absorb substantial potential losses. The Bank also holds strong liquidity positions, although its resource base concentration is increased.

Key rating assessment factors

The business profile (bbb-) remains satisfactory because of the Bank’s consistently transparent ownership structure and stable quality of corporate governance. The Bank’s lines of business are well established and include lending and other financial services to SMEs. The Bank maintains highly diversified operational income based on a significant share of interest revenues on securities and fees in total revenues (42.4% and 19.7%, respectively, as of December 31, 2020). The Bank’s business profile assessment is still limited by relatively low shares in the federal and regional markets. The Bank ranks 84th in equity and 78th in assets among Russian banks.

The Bank’s strong capital position is supported by high indicators (N1.2 stood at 12.7% as of January 1, 2021). The Bank maintains substantial operational profits; the averaged capital generation ratio for 2016-2020 amounted to 192 bps. Due to its substantial loss absorption buffer, high profitability, and low current cost 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 increases well above 500 bps.

The satisfactory risk profile assessment reflects the Bank’s adequate risk management system and high credit quality of assets outside the loan portfolio, on the one side, and the concentration of said portfolio and a high level of market risk, on the other. According to ACRA's estimates, the level of problem and potentially problem loans in the Bank’s loan book stood at 10.1% as of December 31, 2020, while NPL90+ stood at 1.8%. The share of top ten groups of borrowers exceeded 30% of the portfolio. As of December 31, 2020, the Bank’s loan portfolio amounted to less than 20% of assets, although ACRA expects this indicator to return to the level exceeding 20% in the nearest future. Most of the Bank’s assets (more than 50%) come from the securities portfolio, which is dominated by sovereign bonds of the Russian Federation and corporate debt instruments of high credit quality. Significant amount of securities on the Bank’s balance sheet is associated with an increased level of market risk (far exceeding 100% of Tier 1 capital). The Bank also holds certain non-core assets that bring it additional income.

ACRA assesses the Bank’s liquidity position as strong. Due to a substantial amount of cash and unencumbered securities of high credit quality, the Bank has a significant short-term liquidity surplus under the base case scenario in respect of the short-term liquidity shortage indicator. In the stress scenario, this indicator is exceeds 60%. ACRA notes no imbalances for longer periods, as the long-term liquidity shortage indicator exceeds 100%.

Increased dependence on the largest source of funds (the share of retail funds in the Bank’s liabilities is over 60%) limits the funding assessment. ACRA also notes some concentration on the funds of the largest depositors, as of January 1, 2021, the top ten depositors accounted for 20.9% of the total amount of the Bank’s balance sheet liabilities (including 5.6% in transactions with NCC).

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Growth rate of the loan portfolio below 20% in 2021;
  • Cost of credit risk within 3%;
  • N1.2 higher than 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:

  • Reduced loan portfolio concentration on the ten largest borrowers;
  • Reduction of problem loans in the loan portfolio;
  • Substantial reduction in market risk;
  • Increased diversification of resource base.

A negative rating action may be prompted by:

  • Deviation from the current business model;
  • Reduced loan portfolio quality;
  • Reduction in the quality of assets outside the loan portfolio, including investment property on the Bank’s balance sheet;
  • Deterioration in liquidity position.

Rating components

SCA: bbb+.

Adjustments: none.

Support: systemic importance is absent.

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 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 published by ACRA for the first time on June 19, 2017. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

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. 4927-U, dated October 8, 2018. The credit rating is solicited, and SDM-Bank PJSC participated in its assignment.

In assigning the credit ratings, ACRA used only information, the quality and reliability of which was, in ACRA's opinion, appropriate and sufficient to apply the methodologies.

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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