Fitch affirms Subsidiary Bank JSC Sberbank of Russia (Kazakhstan) and Subsidiary Organization JSC VTB Bank (Kazakhstan) rations

February 13. KASE

Fitch affirms Subsidiary Bank JSC Sberbank of Russia (Kazakhstan) and Subsidiary Organization JSC VTB Bank (Kazakhstan) rationsFitch Ratings has affirmed the Long-term foreign-currency Issuer Default Ratings (IDRs) of Kazakstan-based Subsidiary Bank Sberbank of Russia OJSC (SBK) and VTB Bank (Kazakhstan) (VTBK) at ‘BBB-‘. The Outlooks on both IDRs are Stable. A full list of rating actions is at the end of this commentary.

SBK’s and VTBK’s IDRs reflect Fitch’s view of the high probability of support from the banks’ respective owners, Sberbank of Russia (Sberbank, ‘BBB’/Stable) and VTB Bank (VTB, ‘BBB’/Stable) if needed. The parent institutions’ propensity to support their Kazakh subsidiaries would likely be high, in Fitch’s view, given the strategic importance for Sberbank and VTB of their expansions in the CIS region, the subsidiaries’ small relative size (and hence the moderate cost of any potential support), common branding of parents/subsidiaries and significant potential reputational risks arising from a subsidiary default, Sberbank’s and VTB’s strong track record to date of supporting their subsidiaries, including SBK and VTBK and the solid government relations between Russia and Kazakhstan.

At the same time, the one-notch difference between the ratings of the parent and subsidiary banks reflects the cross-border nature of the parent-subsidiary relationships. It also takes into account the fact that Sberbank’s and VTB’s non-Russian operations have yet to demonstrate their strong commercial viability, and some uncertainty as to whether these operations will remain of high strategic importance to the parent banks in the longer term.

SBK’s Viability Rating of ‘b’ reflects the bank’s diminishing capital cushion, rapid growth and high business concentrations. Based on SBK’s management IFRS accounts at end-Q311, the bank’s Basel I Tier I ratio stood at 8.3%, which is a low level in Fitch’s view given the risk profile. Pressure on capital has been caused by rapid loan growth (five-fold over the past three years), and capital ratios are dependent on the performance of the bank’s largest loans (at end-9M11, exposures to the top 20 borrowers totalled 3x equity). Non-performing loans in the unseasoned portfolio were a moderate 2.5% at end-Q311. SBK funds itself domestically, for the most part, but deposit concentrations are also high.

VTBK effectively began operating in Q209, and the scope of its operations is still limited (loan book of USD0.3bn at end-2011). Given its short track record and unseasoned business model, Fitch has not assigned it a Viability Rating. While underwriting standards have been reasonable to date, Fitch cannot rule out the possibility of them being loosened in the future given VTBK’s ambitious expansion plans. VTBK has so far funded its lending operations in the local market; however, parent funding may become more significant as VTBK expands. VTBK has been loss making to date, and management only expects the bank to become profitable in 2013. Capital ratios are currently high (31% total capital ratio at end-11) reflecting significant growth appetite.

SBK and VTB’s IDRs are likely to move in tandem with the IDRs of Sberbank and VTB, respectively. The Stable Outlooks on the subsidiaries currently reflect those on the parent banks.

SBK is the seventh largest bank in Kazakhstan, focusing on corporate business. Sberbank currently owns virtually 100% of SBK. VTBK is the 21st largest bank in Kazakhstan, reflecting its later launch, and targets both corporate banking business and affluent customers on the retail side.

The rating actions are as follows:

SB Sberbank

Long-term foreign currency IDR: affirmed at ‘BBB-‘; Outlook Stable

Long-term local currency IDR: affirmed at ‘BBB-‘; Outlook Stable

Short-term foreign currency IDR: affirmed at ‘F3’

Viability Rating: affirmed at ‘b’

Support Rating: affirmed at ‘2’

National Long Term Rating: affirmed at ‘AA(kaz)’; Outlook Stable

Subordinated Debt Rating: affirmed at ‘BB+’

Subordinated Debt National Rating: affirmed at ‘AA-(kaz)’.

VTBK

Long-term foreign currency IDR: affirmed at ‘BBB-‘; Stable Outlook

Long-term local currency IDR: affirmed at ‘BBB-‘; Stable Outlook

Short-term foreign currency IDR: affirmed at ‘F3’

Support Rating: affirmed at ‘2’

National Rating: affirmed at ‘AA(kaz)’; Stable Outlook

Senior Unsecured Debt Long-Term Rating affirmed at ‘BBB-‘

Senior Unsecured Debt National Rating: affirmed at ‘AA(kaz)’.

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