OREANDA-NEWS. S&P Global Ratings today revised its outlook on SME Bank to stable from negative. At the same time, we affirmedthe long - and short-term issuer credit ratings on the bank at 'BB-/B'.

The outlook revision reflects our view that the setup of the joint-stock company Russian Small and Medium Business Corporation (RSMB Corporation) and the procedures surrounding its interaction with SME Bank have been defined andlegislated and we now see limited risk to the likelihood of timely extraordinary support to the bank from the Russian government.

The ratings on SME Bank are supported by our view of its importance and very strong link to the Russian government as well as its moderate business position and strong capital and earnings.

However, rating constraints include the bank's exposure to changes in the government's economic policy and the challenging and volatile operating environment for banks in Russia, in particular with increasing credit risk as well as limited earnings power under the existing business model.

Following the introduction of a presidential decree on the measures for the further development of small and midsize enterprises (SMEs) in 2015, the Russian government decided to transfer the control of SME Bank from VEB group to the newly created government-related entity (GRE) in charge of SME development. In April 2016, 100% of the shares of the bank were transferred from VEB to the RSMB Corporation, which is owned by the government. Until thenSME Bank was a subsidiary of VEB group.

A new governing order, issued in June 2016, specified the RSMB Corporation's role as the government agency for developing the SME sector. The entity’s strategy is positioned within the framework of the government policy for diversification of the Russian economy as well as the socially important goal of long-term employment stability. The institution’s objectives include improving SMEs' access to credit across the country, implementing the state guarantee programs for SMEs, and channeling of a portion of state procurement to the SME sector. SME Bank will play a key role in these programs.

According to the management of the bank, future support to the SME bank from the corporation could include either a capital injection or a subordinated loan or a deposit. However, the RSMB Corporation's business model is in its early stages and we consider that the mechanism of providing financial supportto the bank is still to be tested. We therefore do not apply any uplift to therating on SME Bank for support from the RSMB Corporation. At the same time, webelieve that the government would mitigate the effects of potential negative extraordinary intervention from the group; yet such interventions are very unlikely, in our view.

However, we regard SME Bank as a GRE with a high likelihood of timely and sufficient extraordinary support from the Russian government. This is based onSME Bank's:

Important role in implementing the state's public policy for development of the SME sector. The bank estimates that its loans represent about 1.5% of total bank lending to SMEs in Russia, its microcredits to SMEs represent about 10%, and leasing to SMEs accounts for 2.5%. We estimate that the bank accounts for 13% in the overall of long-term funding to the SME sector in Russia. We note, however, that from the government's point of view, SME Bank's importance is seen not in terms of market share, but in its role in the development of SME lending infrastructure and new products, closing market gaps, and keeping interest rates low.

Very strong link with the Russian Federation. The state's full ownership and strong oversight of the bank's business and financial plans will, in our view, continue. In addition to its functions related to supporting SMEs, SME Bank is Russia's sole entity with a primary focus on financing SME lending infrastructure companies, such as leasing and factoring institutions, and providing funding to regional banks and other financial institutions. The bank provides financing to 120 banks across Russia.

Our long-term rating on SME Bank is therefore two notches higher than our assessment of the bank's 'b' stand-alone credit profile (SACP).

SME Bank's SACP reflects the 'bb-' anchor for a bank operating primarily in Russia. The rating factor currently supporting SME Bank's financial strength is its strong capitalization, in our opinion. While capital levels are high, with our measure of risk-adjusted capital of 15.91% at end-2015, we forecast the bank will consume capital over the coming years and project ratios of below 15% in the coming 18-24 months due to the difficult economic climate forRussian banks and SMEs. Our assessment of the bank's SACP reflects our view ofits business position as moderate, supported by its public mandate for maintaining SME lending infrastructure by providing funding to financial institutions (mainly regional banks) that onlend to the SME sector; its moderate concentration in the loan book; and its moderate risk position.

Our assessment of the bank’s risk position reflects risks related to lending to many small Russian SME financial institutions, especially in the current macroeconomic conditions that we consider to be challenging for the Russian banking sector. Such specialization generates additional risks given the situation in the banking sector and the recent withdrawals of a number of banking licenses by the central bank.

The stable outlook reflects our view that in the next 12 months, SME Bank willcontinue to benefit from the high likelihood of timely and sufficient extraordinary support from the Russian government and maintain its strong capital and moderate risk positions.

We could take a negative rating action if we considered that the likelihood oftimely extraordinary government support to the bank had reduced, for instance, if its public policy role for or links with the government had weakened. Negative rating actions could also follow if we saw a combination of a lower SACP--potentially as a result of the bank's risk position or capital weakeningdue to high losses or new loan loss provisions--and the lowering of the local currency ratings on the bank's ultimate owner, the Russian Federation.

We could take a positive rating action if we considered that the likelihood ofsupport from the government had increased, for example, due to the bank’s higher public policy role, or if we could factor in the support from the new owner based on our assessment of its credit quality.