OREANDA-NEWS. Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Sberbank Switzerland at 'BBB-' (SBS) and Sberbank Europe AG (SBEU) and Sberbank Slovensko a.s. (SBSK) at 'BB+'. The Outlook on all three banks is Negative.

A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS AND SUPPORT RATINGS

All three banks' IDRs and Support ratings reflect Fitch's view that the banks will be supported by their ultimate parent, Sberbank of Russia (SBRF, BBB-/Negative/bbb-), in case of need. The Negative Outlook on the IDRs is driven by that on SBRF's ratings.

SBRF's Long-term IDRs are driven by the bank's standalone strength, reflected in its 'bbb-' Viability Rating (VR), and are also underpinned by potential support from the Russian Federation (BBB-/Negative). The Negative Outlook on SBRF's ratings mirrors that on the sovereign and reflects both a potential weakening of support and the potential for the VR, which is at the same level as the sovereign, to be downgraded due to risk of a weakening operating environment, as SBRF is exposed to the broader Russian economy.

Fitch's view on the probability of support for the subsidiaries is based on: (i) SBRF's track record of providing capital and funding to subsidiary banks; (ii) high reputational risks for SBRF from any potential default of its subsidiaries given the parent's presence on international markets and (iii) the subsidiaries' small size relative to the parent limiting the cost of any potential support.

Potential reconsideration by SBRF of its international strategy, for example, due to increased geopolitical tensions between Russia and western countries is unlikely to impact its commitment to provide support to the subsidiaries for as long as they are owned by SBRF.

The equalisation of the ratings of SBS with SBRF also takes into account the subsidiary's high integration with the parent, limited operational independence and its role in servicing core group clients, in particular commodity exporters, by providing trade finance services and participating in structured lending as well as client settlements.

The one-notch differential between the Long-term IDRs of SBEU, SBSK and SBRF reflects these subsidiaries' lower integration, higher operational independence and lesser reliance on the parent for business origination.

KEY RATING DRIVERS - VRS

The affirmation of the VRs of SBEU (b+) and SBSK (bb-) reflects limited changes in the banks' standalone profiles over the last 12 months. The VRs continue to reflect the banks' modest franchises; legacy asset quality problems (more significant at SBEU), although the risks are mostly covered by hard collateral/and or SBRF guarantees; weak pre-impairment profitability; and moderate capitalisation (tighter in SBEU). The VRs also consider the banks' sound liquidity and funding profiles.

SBSK's VR is one notch higher than that of its immediate parent SBEU, mainly because the latter is exposed to higher-risk economies, including Serbia, Bosnia and Herzegovina and Ukraine, resulting in weaker asset quality and potentially more significant volatility of the bottom line. SBEU is also somewhat weaker capitalised compared with SBSK.

At end-1H15, non-performing loans (NPLs, 90 days overdue loans), most of which are legacy exposures, equalled 9.5% of gross loans (56% covered by reserves) at SBEU and 6.2% (79% covered by reserves reserved) at SBSK. Both banks' loan concentrations are high, although the largest exposures are of reasonable quality, in Fitch's view. SBEU's Ukrainian exposure was limited to 1% of gross loans and 60% covered by reserves, so of limited extra risk. The quality of new lending in SME and retail segments is so far sound, but may deteriorate somewhat as loans season after above-market growth in 2012-2014. Fitch also notes that a considerable part of SBEU's mortgage loans has fairly high loan-to-values.

Profitability is dampened by thin margins pressured by a low interest rate environment and weak operating efficiency due to lack of scale and not yet completed optimisation processes after the bank was acquired by SBRF. Pre-impairment profit in 1H15 equalled low 0.8% of average gross loans at SBSK and was only marginally above break-even at SBEU. Fitch expects negative bottom line results for SBEU in 2015 and break-even at best for 2016.

Liquidity is comfortable, with liquid assets (cash, net short-term interbank and securities eligible for repo), net of potential near-term wholesale debt repayments, covering 41% and 23% of customer accounts at SBEU and SBSK, respectively. Deposit outflows in 2014-1H15, resulting from geopolitical tensions and sanctions against SBRF, were limited. SBEU's dependence on SBRF's funding fell to 5% at end-1H15 from 11% at end-1H14, as it has been gradually replaced by retail deposits.

SBSK is better capitalised with Fitch Core Capital (FCC) ratio of around 15% at end-1H15 compared with SBEU's 10%. However, both banks' capitalisation is regularly supported by SBRF.

RATING SENSITIVITIES - IDRS AND SUPPORT RATINGS

The support-driven ratings of all three banks are likely to change in tandem with the parent's IDRs.

The IDRs of SBEU and SBSK could be upgraded to the level of SBRF, thereby eliminating the one-notch difference, in case of (i) significantly higher integration with the parent, (ii) an increase in the proportion of business devoted to servicing of core group clients and (iii) an extended track record of profitable operations, reinforcing the parent's long-term strategic commitment to these markets.

All three banks' support-driven IDRs are sensitive to a change in SBRF's support propensity, for example, in case of potential plans to dispose of any of these three banks. Under this scenario, the notching between the parent and the subsidiaries may be widened.

RATING SENSITIVITIES - VRS

An upgrade of SBEU's VR would result from a continued expansion of the bank's franchise and a track record of profitable performance. Upside potential for SBSK's VR is currently limited. However, considerable franchise diversification, a reduction in portfolio concentrations, and stronger profitability would be credit-positive.

Should SBEU or SBSK suffer from either a deep liquidity squeeze or large credit losses, and if those are not promptly cured by SBRF, the VRs could be downgraded.

Fitch may assign a VR to SBS if it develops a more significant franchise and reduces the reliance on the parent in terms of new business origination.

The rating actions are as follows:

SBEU
Long-term foreign currency IDR: affirmed at 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Viability Rating: affirmed at 'b+'

SBSK
Long-term foreign currency IDR: affirmed at 'BB+'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'B'
Support Rating: affirmed at '3'
Viability Rating: affirmed at 'bb-'

SBS
Long-term IDR: affirmed at 'BBB-'; Outlook Negative
Short-term IDR: affirmed at 'F3'
Support Rating: affirmed at '2'