sberbank pjsc · financial institutions credit opinion 26 may 2016 update ratings sberbank pjsc...

FINANCIAL INSTITUTIONS

CREDIT OPINION26 May 2016

Update

RATINGSSberbank PJSC

Domicile Kyiv, Ukraine

Long Term Rating Ca

Type LT Bank Deposits - FgnCurr

Outlook Stable

Please see the ratings section at the end of this reportfor more information.The ratings and outlook shownreflect information as of the publication date.

Analyst Contacts

Lev Dorf [email protected]

Alexander Proklov 7-495-228-6072VP-Senior [email protected]

Yaroslav Sovgyra 7-495-228-6076Associate [email protected]

Sberbank PJSCSemiannual update

Summary Rating RationaleWe assign long-term global local-currency deposit rating of Caa2 which reflects two-notchuplift from the bank's standalone baseline credit assessment (BCA) of ca based on Moody'sassumption of high probability of affiliate support from its parent Sberbank (deposits Ba2 /senior unsecured Ba1 negative, BCA ba2). The BCA of ca reflects Moody's expectation thatthe bank will remain highly reliant on the extraordinary support from its parent to meet itsfinancial obligations, and that in the absence of this support, the bank's capital buffer willnot be sufficient to absorb expected credit losses. Moody's also expects that the bank willcontinue operating under regulatory forbearance over the next 12-18 months, because itsregulatory capital adequacy ratio will remain below regulatory minimum of 10%. In addition,the bank's BCA remains constrained by heightened asset quality risk. The bank's FC depositrating is affirmed at Ca, being capped at that level by the country's FC deposit ceiling of Ca.Moody's has also assigned a Counterparty Risk Assessment (CR Assessment) of Caa2(cr) /Not Prime(cr).

Exhibit 1

Rating Scorecard - Key Financial Ratios

Note: Data for Sberbank PJSC as of end-2015; data for median ca - rated banks as of end-2014Source: Moody's Financial Metrics

Credit Strengths

» High probability of affiliate support from its parent

» Liquidity profile benefits from bank's access to parental funding

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MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 26 May 2016 Sberbank PJSC: Semiannual update

Credit Challenges

» Weak capital buffer and high reliance on external capital support

» Difficult economic conditions and weak local currency put pressure on asset quality

Rating OutlookLong-term ratings carry a stable outlook reflecting the recent improvement in the creditworthiness of the Government of Ukraine andstabilization of the sovereign outlook, suggesting more limited downside risk for the sovereign ceilings. As most bank ratings remainpositioned at the level of the sovereign debt rating or country's foreign and local currency deposit ceilings, their stable outlooks reflectboth (1) this more limited downside risk; and (2) limited upward pressure because of the continued sovereign constraint.

Factors that Could Lead to an UpgradeMoody's considers that upward pressure on Sberbank PJSC 's ratings is unlikely in the near term given the country's still adverseoperating environment in Ukraine. However, in the longer term, bank's ratings could be upgraded following an improvement of thecountry's macro-economic environment, combined with an improvement in bank's standalone credit profiles and/or positive ratingaction(s) on the sovereign ratings/ceilings

Factors that Could Lead to a DowngradeNegative pressure on the bank's ratings could result from (1) increased volatility in the operating environment, leading to growingpressure on the banks' standalone credit profiles, increasing insolvency risk and/or (2) negative rating action(s) on the sovereign ratings,(3) Moody’s perception of a reduced probability of affiliate support for the bank.

Key Indicators

Exhibit 2

Sberbank PJSC (Consolidated Financials) [1]12-152 12-142 12-132 12-122 12-112 Avg.

Total Assets (UAH million) 51806.6 46424.5 35027.0 26364.8 17345.5 31.53

Total Assets (USD million) 2156.1 2934.8 4250.9 3275.1 2165.5 -0.13

Tangible Common Equity (UAH million) 1934.7 3472.4 3884.5 3343.4 2450.2 -5.73

Tangible Common Equity (USD million) 80.5 219.5 471.4 415.3 305.9 -28.43

Problem Loans / Gross Loans (%) 62.0 46.2 14.6 13.2 19.1 31.04

Tangible Common Equity / Risk Weighted Assets (%) 3.7 7.0 11.2 13.9 12.2 9.65

Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) 224.9 220.9 66.4 54.1 65.7 126.44

Net Interest Margin (%) 5.1 6.7 4.9 5.3 5.2 5.54

PPI / Average RWA (%) 4.0 5.3 3.7 4.3 2.8 4.05

Net Income / Tangible Assets (%) -12.2 -0.9 1.6 1.6 2.2 -1.54

Cost / Income Ratio (%) 40.0 39.2 50.5 48.6 60.3 47.74

Market Funds / Tangible Banking Assets (%) 60.7 52.3 31.3 34.1 37.9 43.34

Liquid Banking Assets / Tangible Banking Assets (%) 10.9 16.2 21.4 18.4 18.9 17.24

Gross loans / Due to customers (%) 334.5 287.0 154.1 172.9 199.8 229.74

[1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel I; IFRS [3] Compound Annual Growth Rate based on IFRS reporting periods [4] IFRS reporting periodshave been used for average calculation [5] Basel I & IFRS reporting periods have been used for average calculationSource: Moody's Financial Metrics

Detailed Rating ConsiderationsWEAK CAPITAL BUFFER AND HIGH RELIANCE ON EXTERNAL CAPITAL SUPPORT FROM PARENT



We expect the bank's capital to remain below minimum regulatory requirement of 10% and the bank will continue to operate underregulatory forbearance over the next 12-18 months. As at 31 December 2015, Sberbank PJSC reported Total capital adequacy ratio of4.7% and Tier 1 of 4.3%.

Similar to that of many Ukrainian peers, Sberbank PJSC's capital position significantly deteriorated in 2015 as a result of 1) materialdevaluation of the hryvnia and 2) increasing loan loss provisions, which led to losses.

The National Bank of Ukraine (NBU) conducted a stress-test exercise for Ukrainian banks as a part of the International Monetary Fund'sExtended Fund Facility program for Ukraine. Based on the outcome of the stress-test, NBU required all banks to present capitalizationplans to increase their regulatory capital ratio (N2) above 10% by year-end 2018.

In April 2016, the supervisory board of Sberbank has approved UAH4.3 billion of new capital increase. The capital, which will boostSberbank PJSC authorized capital by 52% to UAH12.5 billion ($490 million), will help to restore its capital base, strengthen its loss-absorption capacity and achieve its capital adequacy ratio (CAR) targets by established deadlines. The recapitalization will be carriedout by converting parental funding into bank capital.

This capital increase is a part of a large recapitalization plan approved by Sberbank in accordance with NBU recommendations. Underthis capital-raising plan, Sberbank PJSC at the end of 2015 had already significantly increased its authorized capital by convertingsubordinated debt into equity.

Sberbank PJSC has simultaneously bolstered its loan-loss provisions to address its asset quality deterioration, which resulted in thebank reporting a low capital ratios.

We negatively adjusted capital score to reflect high reliance on the extraordinary capital support from its parent and that in theabsence of this support, the bank's capital buffer will not be sufficient to absorb expected credit losses. We also expect that the bankwill continue operating under regulatory forbearance over the next 12-18 months.

DIFFICULT ECONOMIC CONDITIONS AND WEAK LOCAL CURRENCY PUT PRESSURE ON ASSET QUALITY

We expect Sberbank PJSC's asset quality indicators to remain very weak, with much of the bank's loan book either becoming overdueor restructured over the next 12 months. The difficult economic conditions in Ukraine, reduction in lending activity and currency havenegatively impacted borrowers' ability to service their loans.

We note that the majority of the bank's loan book (over 87% as at end-2015) is denominated in foreign currency. Given that thehryvnia has depreciated by more than 60% against the US dollar since year-end 2013, borrowers of foreign-currency loans who lackforeign-currency income will come under particular pressure. We also note that the bank is facing particular exposure to foreign-currency-denominated loans and corporate and retail loans originated in the eastern regions of Ukraine directly affected by the militaryconflict. Asset quality deterioration is also evidenced by the rise in the cost of risk ratio, which increased to 16% in 2015 from 7.2% in2014.

According to the audited IFRS report, problem loans ( impaired corporate and nonperforming loans (NPLs) to individuals ( 90+ daysoverdue)) sharply increased to around 62% of gross loans as of end-2015 from 14.6% at year-end 2013. NPL’s tripled in 2015 andincreased to 32% of gross loans from 14.8% as at year-end 2014. Loan-loss reserves accounted for only 24.3% of gross loans at theend of 2015, covering 76% of NPL's or 39% of total problem loans.

We negatively adjusted asset risk score to reflect high level of problem loans, high exposure to FX loans and potential needs to increaseprovisioning.

LIQUIDITY PROFILE BENEFITS FROM PARENTAL SUPPORT

In 2015 Sberbank PJSC's liquidity position has stabilized and we expect it to remain stable over the next 12-18 months. The bank'sliquidity profile has been supported by parental funding, which increased to over 60% of total liabilities at the end 2015 from 35% in2013. Its loan-to-deposit ratio remains high at around 330% in 2015, reflecting the high dependence on the parental funding.

We positively adjusted liquidity and funding scores to reflect the bank's reliance on parental funding and access to committed lines.



Notching ConsiderationsAFFILIATE SUPPORT

We believe there is a high likelihood of affiliate support for Sberbank PJSC from Sberbank (deposit Ba2 senior unsecured Ba1 negative,BCA ba2), given its status as a 100% owned subsidiary of Sberbank and a history of ongoing and extraordinary support in recent years.This results in the two-notch uplift of the bank's rating from its standalone BCA of ca. We note that during 2014-2015, Sberbankprovided substantial liquidity and capital support to Sberbank PJSC and we assume that the parent will likely to continue supporting itsUkrainian subsidiary going forward in case of need.

CR ASSESSMENT

CR Assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt anddeposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial losssuffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or depositinstruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performanceobligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities.

For Ukrainian banks, the CR Assessment is positioned, prior to government support, one notch above the Adjusted BCA and thereforeabove senior unsecured and deposit ratings, reflecting Moody's view that its probability of default is lower than that of seniorunsecured debt and deposits. Moody's believes that senior obligations represented by the CR Assessment will be more likely preservedin order to limit contagion, minimize losses and avoid disruption of critical functions. As a result, the CR Assessment of Caa2(cr) forSberbank PJSC , capped by the local currency deposit ceiling of Caa2, benefit from affiliate support and are aligned with its depositrating.

Rating Methodology and Scorecard Factors

Exhibit 3

Sberbank PJSCMacro FactorsWeighted Macro Profile Very Weak - 100%

Financial ProfileFactor Historic Ratio Macro

Adjusted ScoreCredit Trend Assigned Score Key driver #1 Key driver #2

SolvencyAsset RiskProblem Loans / Gross Loans 62.0% caa3 ← → ca Collateral and

provisioningcoverage

CapitalTCE / RWA 3.7% caa3 ← → ca Expected trend

ProfitabilityNet Income / Tangible Assets -12.2% caa3 ← → caa3 Expected trend

Combined Solvency Score caa3 caLiquidityFunding StructureMarket Funds / Tangible BankingAssets

60.7% caa3 ← → caa2 Marketfunding quality

Liquid Resources



Liquid Banking Assets / TangibleBanking Assets

10.9% caa3 ← → caa2 Access tocommitted facilities

Combined Liquidity Score caa3 caa2Financial Profile caBusiness Diversification 0Opacity and Complexity 0Corporate Behavior 0Total Qualitative Adjustments 0Sovereign or Affiliate constraint: Caa3Scorecard Calculated BCA range caa3-cAssigned BCA caAffiliate Support notching --Adjusted BCA caa2

Instrument Class Loss GivenFailure

notching

Additional notching PreliminaryRating

Assessment

GovernmentSupport notching

Local Currencyrating

ForeignCurrency

ratingCounterparty Risk Assessment 1 0 caa1 (cr) 0 Caa2 (cr) --Deposits 0 0 caa2 0 Caa2 CaSource: Moody's Financial Metrics

Ratings

Exhibit 4Category Moody's RatingSBERBANK PJSC

Outlook StableBank Deposits -Fgn Curr Ca/NPBank Deposits -Dom Curr Caa2/NPNSR Bank Deposits B2.ua/--Baseline Credit Assessment caAdjusted Baseline Credit Assessment caa2Counterparty Risk Assessment Caa2(cr)/NP(cr)

PARENT: SBERBANK

Outlook NegativeBank Deposits -Fgn Curr Ba2/NPBank Deposits -Dom Curr Ba1/NPBaseline Credit Assessment ba2Adjusted Baseline Credit Assessment ba2Counterparty Risk Assessment Ba1(cr)/NP(cr)Senior Unsecured Ba1

Source: Moody's Investors Service

Recent DevelopmentsOn 24 November 2015 -- Moody's has taken rating actions on seven Ukrainian banks and one leasing company. These follow therecent improvement in the creditworthiness of the Government of Ukraine, reflected in Moody's upgrade of Ukraine's sovereign bondrating to Caa3 (stable outlook) from Ca (negative outlook) (please see ' Moody's upgrades Ukraine's sovereign rating to Caa3, outlookstable ' dated 19 November 2015). Moody's has changed the outlooks to stable from negative on all affected banks' ratings.



The affirmation of Subsidiary Bank Sberbank of Russia's long-term LC deposit rating at Caa2 with a stable outlook is driven by theaffirmation of the bank's BCA at ca. This reflects Moody's expectation that the bank will remain highly reliant on the extraordinarysupport of its parent Sberbank (deposits Ba2 / senior unsecured Ba1 negative, BCA ba2) to meet its financial obligations, and that inthe absence of this support, the bank's capital buffer will not be sufficient to absorb expected credit losses. Moody's also expects thatthe bank will continue operating under regulatory forbearance over the next 12-18 months, because its regulatory capital adequacyratio will remain below regulatory minimum of 10%. In addition, the bank's BCA remains constrained by: (1) heightened risks relatedto the bank's very high exposure to foreign currency denominated loans (over 80% of its loan book as at Q3 2015); (2) its substantialexposure to loans originated in the eastern regions directly affected by the military conflict; and (3) a low capital buffer with a totalregulatory capital ratio of 6.8% as at Q3 2015. The bank's FC deposit rating is affirmed at Ca, being capped at that level by thecountry's FC deposit ceiling of Ca. Moody's has also affirmed a Counterparty Risk Assessment (CR Assessment) of Caa2(cr) / NotPrime(cr).

National Scale RatingSberbank PJSC is rated B2.ua by Moody's on Ukraine's national rating scale. National scale ratings (NSRs) are intended as relativemeasures of creditworthiness among debt issuers and issuers within a country, enabling market participants to better differentiaterelative risks.

Foreign Currency Deposit RatingMoody's assigns a Ca foreign currency deposit rating for Sberbank PJSC. The rating is constrained by the foreign currency deposit ceilingfor Ukraine.

Note on Data

Unless noted otherwise, all figures shown in this report are sourced from the bank's latest annual and interim financial reports andadditional information from the bank. In addition, where indicated thought the document we use reference to Moody's BankingFinancial Metrics which are based on our own chart of account, and are adjusted for analytical purposes. Please refer to the documentsentitled "Financial Statement Adjustments in the Analysis of Financial Institutions" published on 19 December 2013.

About Moody's Bank Scorecard

Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgment. When read inconjunction with our research, a fulsome presentation of our judgment is expressed. As a result, the output of our Scorecardmay materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strongdivergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down toreflect conditions specific to each rated entity.



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REPORT NUMBER 1028103



Analyst Contacts

Victoria Voronina 7-495-228-6060Associate [email protected]

CLIENT SERVICES

Americas 1-212-553-1653

Asia Pacific 852-3551-3077

Japan 81-3-5408-4100

EMEA 44-20-7772-5454

sberbank pjsc · financial institutions credit opinion 26 may 2016 update ratings sberbank pjsc...

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