The 'A' rating indicates that Guarantee Fund for Small Businesses of Saratov Region qualifies as a highly reliable guarantee institution. The risk of a failure to meet obligations in time is low.

The key positive drivers for the Fund's rating is its growing capitalization and surety portfolio, a reduction in the amount paid to credit institutions in discharge of guarantee obligations, a low level of subsidiary responsibility, a moderate level of balanced loss ratio, as well as a good sectoral structure of loans provided against the guarantee institution's sureties.

At the end of 2015, the authorized capital of JSC Fund was increased by RUB 76 million (including RUB 3.8 million received from the regional budget) reaching RUB 235,950 thousand. The 47.5% increase in the guarantee capital encouraged the Fund to expand the amount of sureties provided to small businesses in the region. For the 9-month period in 2016, the amount of sureties provided by the Fund increased from RUB 204.0 million to RUB 271.3 million, which lifted the Fund's guarantee capital multiple to more than 100% (119.9% as of October 1, 2016 against 94.2% on January 1, 2016).

This year, the Fund discharged only one payment obligation in relation to the sureties provided against 11 payments to partner banks in 2015. This objectively supports the guarantee institution's rating, even though the amount paid for the 9-month period in 2016 (RUB 6.2 million) is comparable to the amount paid in 2015 (RUB 9.9 million). As of October 1, 2016, the relative balanced loss ratio (compensation payments minus recovery through subrogation procedures in relation to the total amount of sureties provided) was about 3.6%, which, in our view, is quite acceptable, the average loss ratio in the market being 4.9% on January 1, 2015 (based on AK&M Rating Agency's ranking of guarantee institutions).

According to the Fund's statutory documents, the maximum percentage of liability on the loans provided against its sureties is 50%. As of October 1, 2016, the Fund's liability was 36.4%, the lowest of all values on the previous annual reporting dates. The favorable liability structure, in our view, reduces risks of borrowers' defaults and provides better opportunities for recourse procedures; both factors support the guarantee institution's rating.

The sectoral structure of the Fund's sureties correlates rather well (86.6%) with the profile of the consolidated portfolio of loans to legal entities and sole proprietors in Saratov region. Besides, borrowers engaged in the wholesale and retail trade sector account for less than half of the total loan porftolio, which is not typical for regional guarantee funds. Therefore, the level of infrastructure risks attributed to the surety portfolio (portfolio-at-risk ratio) can be considered as insignificant.

The key rating constraints include a persistent imbalance between the value of liquid assets and the amount of shareholder equity, as well as higher potential losses from borrowers' defaults due to a substantial increase in the average surety amount and the average amount of loan secured by the Fund's surety.

Despite the previously mentioned surety portfolio expansion, the number of contracts decreased (76 on October 1, 2016 against 86 at the start of the year). As a result, the average value of off-balance sheet liability soared by more than 50% for the 9-month period. The average loan amount saw a still stronger growth (+75%). Besides, the loan portfolio concentration strengthened. As of October 1, 2016, the 5 largest borrowers accounted for 31.6% of the Fund's surety-related liability balance (against 20.9% the year before). This implies higher potential losses from borrowers' defaults, which could impair the guarantee institution's financial profile.

The Fund's rating is additionally constrained by the Fund's low return ratio and its locally negative financial result. The income and expense statement provided in Form 23 of the regulatory report (unadjusted for provisions for payments under surety agreements) shows that the guarantee institution's actual loss was approximately RUB 8 million in 2015 and more than RUB 14 million in the preceding year. However, for the 9-month period in 2016, the Fund earned a profit of RUB 4.5 million as a result of higher earnings, a reduction in payments under surety agreements and lower operating costs.

In the course of quarterly monitoring, AK&M Rating Agency will keep a close eye on the Fund's balance of assets and equity, watch the ratio of its income and expenses and take rating actions as appropriate.

Joint-stock company Guarantee Fund for Small Businesses of Saratov Region was registered on October 8, 2007. Its sole shareholder is Saratov region represented by the Ministry of economic development and investment policy of the region. The Fund has been providing sureties to small businesses in the region since 2010.

As of September 30, 2016, JSC Fund concluded 476 surety agreements for a total amount of almost RUB 1 billion. The loans provided against the Fund's sureties exceeded RUB 2.5 billion.

AK&M Rating Agency assigned a guarantee institution rating to JSC Fund for the first time on December 17, 2015. All rating action announcements are available on the akmrating.ru website.

The rating is valid until November 2017. AK&M Rating Agency may revise the rating and/or the outlook during this period if circumstances fundamentally influencing the guarantee institution's rating are revealed.

For estimation purposes, we completely rely on the reliability of information provided by the Customer. The rationale for AK&M Rating Agency's judgment on the rating may include information acquired from other sources we deem to be reliable; however, the agency does not check the input data exhaustively and disclaims all responsibility for their possible errors.

This press release is based on the Statement of assignment of a credit rating to JSC Guarantee Fund for Small Businesses of Saratov Region and the Credit Rating Methodology for Guarantee Organizations rev. March 3, 2015.

The rating, along with any information and conclusions provided in this press release, only conveys our opinion on the guarantee institution's efficiency in providing credit support to small and medium-sized businesses in the region.

AK&M Rating Agency shall not be held liable for any interpretations, inferences and consequences related to the application of results of the rating estimation procedure by any third parties.

AK&M Rating Agency is a leading independent national rating agency engaged in rating activities since 1993.

AK&M Rating Agency

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www.akmrating.ru

Phone no.: (495) 916-70-30, fax no.: (499) 132-69-18.