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Oct 2 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Vienna-based Sberbank Europe AG (SBEU) a Long-term Issuer Default Rating (IDR) of ‘BBB-‘ with a Stable Outlook and a Viability Rating (VR) of ‘b+’. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS - IDRS, SUPPORT RATING
SBEU’s Long-term IDRs are underpinned by potential support from its shareholder, the state-controlled Sberbank of Russia (SBRF; BBB/Stable/bbb), reflecting Fitch’s view of the high probability of SBRF providing support to SBEU if needed.
Fitch classifies SBEU as a ‘strategically important’ subsidiary of SBRF. This is based on i) SBRF’s 100% ownership and the parent’s focus on developing its international business; ii) the track record of providing capital and funding since SBEU’s acquisition; iii) high reputational risks for SBRF from any default of SBEU; iv) SBEU’s currently moderate operational independence and v) its small size relative to the parent, which limits the cost of any potential support.
The one-notch difference between the ratings of SBRF and SBEU is driven by the cross-border nature of the parent-subsidiary relationship, the short track record of performance under the new owner and the currently small (albeit rising) share of SBEU’s business with the parent’s core clients.
KEY RATING DRIVERS - VR
SBEU’s ‘b+’ VR reflects the bank’s weak asset quality, which was inherited from the previous owner and average (albeit in line with the market) level of reserves, in light of which capitalisation is moderate, in Fitch’s view. The rating also reflects SBEU’s weak performance, which is pressured by operating in a low interest rate environment, sluggish economic growth in CEE countries, effects from banking taxes and integration costs to set up the management functions previously absent in the bank. At the same time, the rating considers SBEU’s reasonable funding base, sound liquidity and improved capital position after recent equity injections by the parent.
SBEU was formerly known as Volksbank International and was acquired by SBRF in February 2012 for a total consideration of EUR505m. The deal also required SBRF to replace EUR2.1bn of funding from SBEU’s previous shareholders. SBEU operates through subsidiaries in eight CEE and SEE countries (Czech Republic, Slovakia, Hungary, Slovenia, Serbia, Croatia, Bosnia and Herzegovina, and Ukraine) and has been recently granted a banking license for operations in Austria. Historically, the group has had a strong focus on retail and SME clients (which comprised 42% and 26% of the end-H113 consolidated loan portfolio) but is now expanding to servicing larger corporates in cooperation with the parent. At the same time, SBEU is likely to retain a significant focus on retail and SME business in the local markets where it operates, utilising the parent’s platforms and expertise.
During 2012, SBEU had to create additional reserves upon the application of the parent’s more conservative risk assessment methodologies, which together with integration costs and, to a lesser extent, banking taxes in Hungary, Slovakia and Austria, resulted in a significant loss for the period (-2.8% ROAA). In H113, SBEU showed improvement to ROAA of -0.6% as impairment charges reduced while pre-impairment profit was 0.5% of average assets on the back of higher revenues (favourable refinancing conditions allowed the net interest margin to climb to 3.0% in H113 from 2.8% in 2012, and fee income grew slightly as SBEU set up its trade finance business). At the same time, SBEU is building up the parent bank in Austria and continues to invest in infrastructure, which is putting additional pressure on profits. Management targets break even by the end of 2013, although its longer term goal of double-digit returns on equity may prove difficult to achieve on the back of currently low demand for credit in the countries of operation and low interest rates.
The quality of SBEU’s loan portfolio suffers from legacy problem exposures, which are responsible for the high proportion of non-performing loans (NPLs, loans overdue by 90 days and more) of 10.8% at end-Q113. At the same time, asset quality is gradually improving as reflected in the stabilisation of the NPL ratio in H113. However, reserve coverage of NPLs remains moderate at 63%, particularly given the 7% share of restructured exposures, and reflects the bank’s high reliance on collateral. SBEU’s exposure to the vulnerable real estate and construction sector is reducing but remains a high 185% of end-H113 Fitch core capital (FCC). Analysis of the largest loans shows the generally good quality of recently acquired clients, which are mainly represented by energy utilities and oil & gas companies.
SBEU is mostly funded by deposits, which accounted for 68% of the bank’s liabilities at end-H113. SBEU’s deposit collection capacity benefited from its rebranding in 2012 (it now shares the same brand as the parent) with customer funding growing by 27% in 2012 and a further 10% in H113. Funding from the parent decreased to 14% of end-H113 liabilities at the consolidated level and is likely to remain at this level or slightly above it due to the funding needs of the growing Austrian bank. SBEU’s sound liquidity (at end-H113, liquid assets covered 25% of total customer funding) is underpinned by large holdings of securities eligible for repo. Fitch also understands that SBRF is ready to provide emergency liquidity support in case of need.
The bank’s capital position notably improved in H113 following the equity injection by the parent, with the FCC ratio up to 9% from 6.9% at end-2012. However, it remains only moderate in light of the somewhat high level of unreserved NPLs and restructured loans, as the bank could additionally reserve only 5% of end-H113 gross loans, Fitch estimates. Despite significant capital contributions from the parent (both as equity and subordinated debt) to date, further capital may be required given the bank’s growth plans and current inability to generate capital on its own.
RATING SENSITIVITIES - IDRS, VR, SUPPORT RATING
Any action on SBRF’s IDRs would likely be matched by a similar action on SBEU’s IDRs. In addition, SBEU’s Long-Term IDR could be upgraded to the level of SBRF if it extends its track record of operating as a highly integrated subsidiary of SBRF, with business primarily focused on servicing SBRF’s core clients.
An upgrade of SBEU’s VR would require a track record of profitable performance and significant improvement of asset quality and/or a further recapitalisation of the bank. Continued losses and/or further asset quality deterioration could result in a downgrade of the VR.
The rating actions are as follows:
Long-term IDR assigned at ‘BBB-‘; Outlook Stable
Short-term IDR assigned at ‘F3’
Viability Rating assigned at ‘b+’
Support Rating assigned at ‘2’