By Rounak Bhagwat

India Ratings and Research (Ind-Ra) has affirmed Sberbank Branch in India’s (SBERIN) certificate of deposit (CD) programme as follows:

Instrument Type

ISIN

Date of Issuance

Coupon Rate (%)

Maturity Date

Size of Issue (million)

Rating

Rating Action

CD programme

-

-

-

-

INR1,000

IND A1+

Affirmed

KEY RATING DRIVERS

Local Branch of SBER Bank, Russia: The rating reflects the financial strength of SBERIN’s parent, Sberbank of Russia (Sberbank; Fitch Ratings Long-Term Issuer Default Rating: ‘BBB-/Positive, Viability Rating: ‘bbb-’) and Ind-Ra’s expectation of continued strong support from the parent. Being a branch and part of the same legal entity as Sberbank, SBERIN’s liabilities are those of Sberbank, and Ind-Ra expects all forms of support for the branch. The high probability of support is emphasised by SBERIN’s explicit linkages with Sberbank. SBERIN’s policies on liquidity and risk management follow Sberbank’s policies, and there is a close oversight on SBERIN’s operations by Sberbank.

 

Credit Cost Overhang on Profitability: At an operating level, SBERIN’s pre-provision operating profit ratio was 4.41% of total earning assets at FYE17 (FYE16: 4.57%), while net interest margin improved to 8.53% (7.58%). However, the branch is expected to continue to bear credit costs (FY17: 3.53%, FY16: 3.87%) as the non-performing assets (NPAs) on the balance sheet witness aging. The agency expects the bank to either make modest profits or loss in FY18 (return on average assets: FY17: 0.03%)


Capitalisation, Asset Quality: The branch’s operations are adequately capitalised with equity of INR2.74 billion and loan book of INR1.93 billion at FYE17. SBERIN reported a CET1 ratio of 95.13% at FYE17 (FYE16: 54.60%). The branch plans to maintain a cautious approach to advances growth in the near term with increased focus on off-balance sheet exposures than corporate advances.


Sberbank operates through a branch structure in India, with the only branch located in Delhi. The branch has a highly concentrated loan portfolio, with top 20 exposures making up for 100% of the portfolio Borrower concentration exposes SBERIN to significant NPA and credit cost volatility, some of which manifested in the rise in NPAs to 34.0% in FY17 (FY16: 25.2%).

Adequate Liquidity: Although SBERIN has a matched asset liability profile with no significant gaps in up to one-year maturity buckets, in case of a significant uptick in stressed loans (beyond current levels), it may need to lean on the contingency line of INR1.9 billion from the Russian parent, which has not been drawn till date. SBERIN does not expect to draw on the contingency line in the near term given its comfortable equity buffers. The continuation of this contingency line will be a key monitorable for the rating.


RATING SENSITIVITIES

Negative: If Sberbank’s Long-Term Issuer Default Rating is downgraded by Fitch Ratings, this may trigger a negative rating action for SBERIN. Also, any reduction in the parent’s commitment to SBERIN, although unexpected (such as the inability to roll over the current committed line into 2018, present one is valid till 2017), or a severe impact arising from further slippages in SBERIN’s concentrated loan book, may also trigger a negative rating action.


COMPANY PROFILE

Sberbank received approval from the Reserve Bank of India in May 2010 to set up a branch in India and registered the same by September 2010. The main objective of the branch is to create a strategic presence in the Indian market which has been identified as a market with high potential. The branch has domestic credit exposures, with a loan book size of INR3 billion and operates primarily in the corporate space, both on the liability and asset front. The branch first disbursed loans in FY13 and turned profitable in FY15.

 

FINANCIAL SUMMARY

Particulars

FY17

FY16

Total assets (INR million)

4,620.4

4,435.4

Total equity (INR million)

2,748.6

1,949.8

Net income (INR million)

1.4

-6.1

Return on average assets (%)

0.03

-0.15

Equity/assets (%)

59.49

43.96

Capital adequacy ratio (%)

96.74

55.10

Source: Company annual report

 

 


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

4 August 2016

 

CD programme

Short-term

1,000

IND A1+

IND A1+

 


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity level of the instruments please visit https://www.indiaratings.co.in/complexity-indicators.
 

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

ABOUT INDIA RATINGS AND RESEARCH

India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

Ind-Ra currently maintains coverage of corporate issuers, financial institutions (including banks and insurance companies), finance and leasing companies, managed funds, urban local bodies, structured finance and project finance companies. 

Headquartered in Mumbai, Ind-Ra has six branch offices located in Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad and Kolkata. Ind-Ra is recognised by the Securities and Exchange Board of India, the Reserve Bank of India and National Housing Bank. 

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For more information, visit www.indiaratings.co.in.

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Analyst Names

  • Primary Analyst

    Rounak Bhagwat

    Analyst
    India Ratings and Research Pvt Ltd Wockhardt Towers, 4th floor, West Wing Plot C-2, G Block. Bandra Kurla Complex Bandra (East), Mumbai 400051
    +91 02240001757

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121