Russia-Based Sudostroitelny Bank Downgraded To 'B-/C' On Deteriorating Funding Profile; Outlook Stable
November 10, 2014 Standard & Poor's
Nov. 7, 2014--Standard & Poor's Ratings Services today lowered its long- and short-term counterparty credit ratings on Russia-based Commercial Bank Sudostroitelny Bank LLC (SB Bank) to 'B-/C' from 'B/B'. The outlook is stable.
At the same time, we lowered our Russia national scale rating on SB Bank to 'ruBBB' from 'ruBBB+'.
The downgrade reflects our view that SB Bank's funding profile has structurally weakened. We now assess funding as "below average" versus our previous "average" assessment.
The bank's funding base is deteriorating, in our view, with its stable funding ratio declining to 87% at midyear 2014 from 107% at year-end 2012, which is below its peers' average ratio of 120%. In addition, the funding profile of the bank has not become more balanced over 2014, as we expected a year ago, and its loan-to-deposit ratio has deteriorated to 135% at midyear 2014 from 118% at year-end 2012.
We also note SB Bank's increasing dependence on Russian central bank funding, which comprised almost 20% of its total liabilities as of midyear 2014 versus 13% on Dec. 31, 2013, which is more than the system average. Although this increase in funding from the central bank supports the bank's liquidity position temporarily, it indicates a weakening of the bank's funding profile.
We note that the bank managed to repay its Russian ruble (RUB) 3 billion bond maturities in 2014 (approximately $76 million). However, the bank may find it difficult to replace the repaid bonds within the next six months, owing to unfavorable conditions in the domestic debt and capital markets. As a result, we think that its funding profile is unlikely to improve in the next 12 months.
Moreover, customer accounts slightly reduced from 54% of total liabilities at year-end 2013, to 52% at midyear 2014. We view positively the increase of the share of individual accounts to 56% of total clients' funds as of midyear 2014 from 46% as of year-end 2013, which offsets the reduction of corporate client funds. Concentrations are also improving, with the top 20 depositors accounting for 17% of total customer funds as of June 30, 2014, down from 24% as of year-end 2013. However, this concentration still makes the bank somewhat vulnerable to potential larger client withdrawals. This is partially offset though by the bank's longstanding relationship with some of its larger clients.
We believe that SB Bank's liquidity cushion is adequate, with broad liquid assets constituting about 27% of the balance sheet. The bank should be able to obtain additional liquidity by pledging or selling its securities portfolio, although we note that the bank had already used about 74% of its securities portfolio for repos as of June 30, 2014. Moreover, we view positively shareholder support in terms of subordinated loans and cash donations, which we expect to be converted to subordinated debt by end-2014. We assume that the bank will make no substantial changes to its current liquidity management in 2014.
Our assessment of SB Bank's business position remains weak and is based on our view of its limited market share and customer franchise, with quite significant concentrations in the loan book.
Our assessment of SB Bank's capital and earnings as moderate reflects our view of the bank's gradually declining capital position, as its earnings capacity is lower than most peers' and prevents internal capital buildup. This assessment is based primarily on our expectations that the risk-adjusted capital (RAC) ratio before adjustments for concentration and diversification will remain at 5.0%-5.5% over the next 18 months, down from 6.1% at the end of 2013.
In our view, SB Bank's overall risk position is "moderate," given its focus on the more risky SME segment and a likely increase in cost of risk on the one hand, and its moderate growth rates and reasonable risk management practice on the other. SB Bank aims to continue focus on the SME segment, which we believe is a riskier segment in Russia, with clients less willing to pay their debt compared with other sectors. This risk is partly mitigated by the short-term profile of the loan book (around 80% of the loan book consists of loans of less than one year), which reflects the bank's focus on financing clients' working capital needs. This enables the bank to minimize losses resulting from default, as it can cut exposures relatively rapidly and in turn reduce risk.
The bank's nonperforming loans (NPLs) are still lower than the system average but are likely to increase to about 4% over the next year. We consider positively the ample coverage of NPLs by reserves, which we expect to remain at about 160% for 2014-2015. Still, we believe the bank's exposure to the risky SME segment could impair its credit risk profile, especially if the economic slowdown intensifies in Russia.
The stable outlook on SB Bank reflects our view that the bank will continue to focus on the SME segment while maintaining its capitalization and risk profile at, or only marginally below, current levels. We also expect the bank will be able to maintain adequate liquidity.
We could consider a negative rating action if capitalization fell, as reflected in a RAC ratio before adjustments of less than 5%. We could also lower the rating if NPLs increased significantly above the system average.
Although unlikely within the next 12 months, we could consider a positive rating action if we observed improvement in the Russian banking sector's operating environment and, as a result, the bank was able to structurally improve its funding profile by reducing its dependence on central bank funding and making its funding base more sustainably balanced.
Company — Sudostroitelny Bank
Full nameCommercial bank "Sudostroitelny bank" (LTD)