September 1, 2017 / 3:43 PM / a year ago

Fitch Affirms Sovcombank at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, September 01 (Fitch) Fitch Ratings has affirmed PJSC Sovcombank's (SCB) Long-Term Issuer-Default Ratings (IDRs) at 'BB-'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The ratings reflect the strong financial metrics of SCB, especially its long record of sound asset quality and robust performance, as well as its recent rapid growth and niche franchise. At end-1H17, SCB's reported NPLs were a low 2.4% of gross loans and were mainly attributable to the bank's unsecured consumer lending (24% of total loans). The non-retail book was mainly represented by granular, low to moderate risk exposures to Russian sub-sovereigns and municipalities and top tier companies, which are predominantly state-owned or highly rated (BB rating category or higher). The quality of the bond portfolio (around 56% of total assets, including those recognised in loans to customers) is also strong as 86% of bonds are rated 'BB' or higher. Fitch views SCB's core performance as robust, despite around 30% of operating profit in 1H17 being derived from positive mark-to-market (MTM) revaluation of the bond portfolio, which is a non-recurring income source. Even net of these MTM gains and other one-off items (the largest one being the gain from the acquisition of Express Volga Bank in 2016) annualised return on average equity for 1H17 and 2016 was solid at 30% and 38%, respectively. Over the last 12 months, SCB has significantly mitigated interest rate risk stemming from its sizable bond portfolio by entering into long-term interest rate swaps in US dollars with large, highly-rated banks with a total notional amount of USD1.1 billion (RUB65 billion equivalent), which hedges around 70% of the potential fair value movement in the US dollar-denominated bonds (53% of trading portfolio at end-1H17). Interest rate risk is additionally mitigated by the significant capital buffer relative to potential MTM losses and the bank's track record of managing this risk. Market risk also stems from the bank's sizable open long on-balance sheet currency position, reflecting sizable investments in USD-denominated bonds financed by rouble customer deposits. However, in July 2017 SCB entered into sizable one-year currency swaps with large, highly-rated Russian banks, replacing short-term swaps with maturities of up to two weeks, which has moderated currency risk, in Fitch's view. SCB's capital position has been gradually improving due to moderate loan growth (CAGR of 20% in 1H17-2016 after rapid expansion in 2014-2015) and healthy internal capital generation (about 40% for the same period) and the Fitch Core Capital ratio was a reasonable 13.5% at end-1H17. The bank's significant investments in the smaller Rosevrobank (BB-/Stable/bb-) have so far put limited pressure on SCB's capital position. Fitch believes SCB could gradually increase its stake in Rosevrobank without a significant reduction in capital ratios, given its strong internal capital generation and the potential to deleverage through bond sales, if required. SCB has predominantly been funded by fairly granular retail deposits (50% of total liabilities at end-1H17) and secured repo borrowings from large Russian banks (a further 34% of liabilities). Liquidity is supported by a sizable liquidity cushion, including cash and unpledged securities (29% of end-1H17 total liabilities), and part of the loan book (9% of liabilities) could also be pledged to raise funding from the Central Bank of Russia. SCB's senior unsecured debt rating is aligned with the bank's Long-Term Local-Currency IDR, reflecting Fitch's view of average recovery prospects, in case of default. The '5' Support Rating and 'No Floor' Support Rating Floor reflect Fitch's view that support from either the bank's shareholders or the Russian authorities could not be relied upon, in case of need. RATING SENSITIVITIES An upgrade of SCB's ratings would require further development of the bank's franchise and a track record of more balanced, moderate growth. Downside could stem from sharp deterioration in asset quality leading to material capital erosion, or mismanagement of liquidity and market risks arising from the bank's trading activities. The rating actions are as follows: PJSC Sovcombank Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlooks Stable Short-Term Foreign Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'BB-' Contact: Primary Analyst Roman Kornev Director +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst Ruslan Bulatov Associate Director +7 495 956 9982 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; 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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