By Ruhi Pabari

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

-

-

-

7-365 days

INR1,000

IND A1+

Affirmed

Analytical Approach: The affirmation of the CD rating factors in Sberbank Branch in India’s branch model of operation with the rating driven by the parent, Sberbank of Russia’s Long-Term Issuer Default Rating. For analyzing Indian branches of foreign banks, the agency derives the rating from Fitch Ratings’ Long-Term Issuer Default Rating on the parent as the branch’s balance sheet is consolidated at the parent level. The agency recognises that the branch’s liabilities are those of the parent, with any risk of default signifying a default at the parent level.
 

KEY RATING DRIVERS

Local Branch of Sberbank ofRussia: 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. SBERIN’s policies on liquidity and risk management follow Sberbank’s policies, and there is a close oversight on SBERIN’s operations by Sberbank.

Capitalisation and Asset Quality:
 The branch’s operations are adequately capitalised with equity of INR2.60 billion and committed credit lines of INR1.93 billion from the parent. SBERIN reported common equity tier 1  ratio of 91.73% at FYE18 (FYE17: 95.13%). 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.

The branch’s exposure to borrower concentration risk remains high with the top 20 exposures accounting for the entire portfolio. This also exposes SBERIN to significant credit cost volatility as manifested in a rise in credit cost ratio to 27.54% in FY18 (FY17: 4.07%). While non-performing assets continue to be high at 42.56% at FYE18 (FYE17: 43.41%), there were no fresh slippages in FY17 and FY18.
 

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 INR1.93 billion from the 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 rating sensitivity. Moreover, the branch has access to a reserve of around INR0.8 billion maturing in March 2019, which shall be renewed.

Credit Cost Overhang on Profitability:
 At an operating level, SBERIN’s pre-provision operating profit ratio was 2.63% of total earning assets at FYE18 (FYE17: 4.41%), while net interest margins (NIMs) contracted to 7.98% (8.53%). The decline in NIM was due to a 36% yoy fall in net advances to INR1.24 billion at FYE18. Further, with the balance sheet witnessing aging leading to 100% provisioning of its non-performing assets, credit costs rose significantly in FY18. Ind-Ra expects SBERIN’s profitability to remain weak , considering the continuous contraction in the loan book during FY16-FY18 and no immediate visibility on growth plans.


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 2019, present one is valid till 2018), 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 INR1.24 billion and operates primarily in the corporate space, both on the liability and asset front.

FINANCIAL SUMMARY

Particulars

FY18

FY17

Total assets (INR million)

4,103.6

4,620.4

Total equity (INR million)

2,597.7

2,748.6

Net income (INR million)

-150.9

1.4

Return on average assets (%)

-3.46

0.03

Equity/assets (%)

63.30

59.49

Capital adequacy ratio (%)

92.47

95.74

Source: Company annual report


RATING HISTORY

Instrument Type

Current Rating

Historical Rating

Rating Type

Rated Limits (million)

Rating

30 October 2017

4 August 2016 

CD programme

Short-term

1,000

IND A1+

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

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 and project finance companies. 

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

India Ratings is a 100% owned subsidiary of the Fitch Group.

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

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Analyst Names

  • Primary Analyst

    Ruhi Pabari

    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 22 40001757

    Media Relation

    Namita Sharma

    Manager – Corporate Communication
    +91 22 40356121