September 12, 2017 / 11:49 AM / 10 months ago

Fitch Affirms 2 Sberbank European Subsidiaries; Outlooks Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, September 12 (Fitch) Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Sberbank Switzerland at 'BBB-' (SBS) and Sberbank Europe AG (SBEU) at 'BB+'. The Outlooks are Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS - IDRS AND SUPPORT RATINGS The banks' IDRs and Support Ratings reflect Fitch's view that they are likely to be supported by their ultimate parent, Sberbank of Russia (SBRF, BBB-/Stable/bbb-), in case of need. SBRF's Long-Term IDRs are driven by the bank's standalone strength, reflected in its 'bbb-' Viability Rating (VR), and are also underpinned by potential state support from Russia (BBB-/Stable). Fitch's view on the probability of support for SBRF's subsidiaries is based on: (i) the strategic commitment of SBRF to support its European subsidiaries in line with its strategy of international business development; (ii) a strong track record of SBRF providing capital and funding support to date (particularly to SBEU); (iii) full ownership and common branding; (iv) high level of managerial and operational integration between the parent and the subsidiaries (particularly for SBS); (v) high reputational risks for SBRF from any potential default of its subsidiaries given the parent's presence in international markets; and (vi) the subsidiaries' small size relative to the parent, limiting the cost of any potential support. The equalisation of SBS and SBRF's ratings takes into account the subsidiary's high integration with the parent; limited operational independence; and its role in providing complimentary services to core group clients. The one-notch differential between the Long-Term IDRs of SBEU and SBRF reflects SBEU's somewhat lower integration, higher operational independence and lesser reliance on the parent in terms of funding and business origination compared with SBS. KEY RATING DRIVERS - VR The affirmation of SBEU's VR at 'b+' reflects limited changes to the bank's credit profile over the last 12 months. The VR continues to reflect SBEU's modest franchise and limited pricing power; legacy asset quality problems and sluggish performance. Positively, the VR reflects SBEU's sound funding and liquidity profiles and adequate core capitalisation. At end-1Q17, non-performing loans (NPLs, loans 90 days overdue plus otherwise impaired loans), equaled a high 12% of gross loans. SBEU's largest high risk exposure is EUR230 million (16% of Fitch Core Capital (FCC)) loan to a weak Croatian-based food retailer, which is currently undergoing restructuring. According to management, risks relating to this exposure will be covered by SBRF (the group's total exposure to this borrower exceeds EUR1 billion), which would either take this exposure on its balance sheet or provide additional capital support to SBEU to cover the losses. Excluding this exposure, the origination of new NPLs has been limited in recent years and the remaining NPLs are rather granular legacy loans. Loan concentrations are high, although SBEU's 20 largest corporate loans (1.8x FCC at end-1Q17) are of adequate quality, in Fitch's view, as these are exposed either to CEE majors or relatively strong Russia-related businesses. SBEU's capitalisation is reasonable as expressed by a high 15.5% FCC ratio at end-2016. EUR320 million of loss-absorbing subordinated debt from SBRF equals to a further 4% of risk-weighted assets. Fitch expects capital adequacy to remain stable in the next few years, given moderate anticipated loan growth (it was close to zero in 2016-1H17). However, capital ratios should be viewed in the context of the modest coverage of NPLs with impairment provisions (42% at end-1Q17). Fitch estimates that the bank could potentially increase loan impairment reserves by around EUR500 million (5.5% of gross loans) covering NPLs by about 90%, while still maintaining a double-digit FCC ratio. Weak profitability is another drag on SBEU's capital position. SBEU's pre-impairment performance is under pressure from weak (albeit gradually improving) operating efficiency and thin margins that are dampened by a low interest rate environment and a high portion of low-yielding liquid assets. SBEU's recurring pre-impairment profit equaled just 1.2% of gross loans in 2016 and is unlikely to improve in the near term. Therefore if credit risks exceed 1%, which is possible in the downside of the credit cycle, the bank's net performance may become loss-making, making it dependent on capital support from the parent to maintain capital ratios. Funding and liquidity is a rating strength. SBEU pursues a self-funding strategy and is 71% customer funded at end-1H17. Reliance on parent funding has reduced to 6% of total liabilities over recent years (including the EUR320 million subordinated borrowing). The liquidity buffer was substantial at EUR3.6 billion, which is sufficient to repay all wholesale funding due in 2H17 and 2018, and still cover around 27% of customer funding with remaining liquid assets. RATING SENSITIVITIES IDRS AND SUPPORT RATINGS Any rating action on the support-driven ratings of both banks is likely to mirror that on the parent bank. SBEU's IDRs could be upgraded to the level of SBRF, eliminating the one-notch difference, in the event of (i) significantly higher integration with the parent; (ii) an increase in the proportion of business devoted to servicing core group clients; and (iii) an extended track record of profitable operations, reinforcing the parent's long-term strategic commitment to its subsidiary. Both banks' support-driven IDRs are sensitive to a change in SBRF's support propensity, for example, in case of plans to dispose of either of the banks. Under this scenario, the notching between the parent and the subsidiaries may be widened. VR An upgrade of SBEU's VR would require an extended track record of stronger quality and performance. Conversely, a marked deterioration of SBEU's asset quality resulting in significant bottom-line losses could result in a downgrade. Fitch may assign a VR to SBS once it develops a more significant independent franchise and reduces the reliance on the parent in terms of funding and new business origination. The rating actions are as follows: SBEU Long-Term IDR: affirmed at 'BB+'; Outlook Stable Short-Term IDR: affirmed at 'B' Support Rating: affirmed at '3' Viability Rating: affirmed at 'b+' SBS Long-Term IDR: affirmed at 'BBB-'; Outlook Stable Short-Term IDR: affirmed at 'F3' Support Rating: affirmed at '2' Contact: Primary Analyst Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Artur Szeski (SBEU) Senior Director +48 22 338 6292 Roman Kornev (SBS) Director +7 495 956 7016 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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