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Fitch: Near-Term Prospects Improving for Russian Retail Banks
February 13, 2017 / 1:49 PM / 6 months ago

Fitch: Near-Term Prospects Improving for Russian Retail Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Peer Review: Russian Consumer Finance Banks here MOSCOW, February 13 (Fitch) The near-term prospects for Russian retail banks are improving, as loan impairments and funding rates will continue to reduce in 2017, Fitch Ratings says. Most loans issued from 2010 to 2013, when rapid growth in lending amid intense competition led to severe deterioration of asset quality and a sharp increase in credit losses, have been repaid or written off. Portfolios now mainly comprise loans of better quality, issued under stricter approval criteria from 2014. The rebound in the Russian consumer finance market after two years of deep bottom-line losses is highlighted by our review of four of the banks we rate (Tinkoff, OTP Bank (OTP), Home Credit & Finance Bank (HCFB) and Orient Express Bank (OEB)) that are focused on unsecured retail loans. Their average credit losses (defined as the increase in loans 90 days' overdue, plus write-offs, divided by average performing loans) fell to 11% in 9M16 from 19% in 2015. We expect these banks will report single-digit credit losses in retail in 2017. We expect strong ROAEs to be reported for 2016 (15%-20% for OTP and HCFB and about 40% for Tinkoff) and similar or even stronger results for 2017. However, OEB's retail business is likely to break even at best in 2016. OEB has the highest credit losses and hence the weakest bottom line among its peers and its 2017 performance will depend on the impact of its recent merger with Uniastrum Bank. We expect policy rate cuts and continued strong deposit inflows to bring down the sector's funding costs further in 2017, helping earnings. Funding costs have been high since a sharp increase in deposit rates when the key policy rate was raised in December 2014, but they fell during 2016. For the banks we reviewed, we expect internal capital generation to remain above loan growth, assuming no significant changes to dividend policies, although the picture is less certain for OEB as its growth strategy is in transition. Healthy profit retention and limited growth in the near term may boost loss-absorption capacity and improve capital ratios, helping the banks to comply with rising regulatory capital requirements as capital buffers are phased in. The economy and regulation pose the main risks to the sector. Real disposable incomes in Russia have fallen for the past two years - a risk for consumer finance asset quality. In addition, increased regulation has already led to interest rate caps and punitive risk weightings for consumer finance loans. We believe recent proposals to tighten risk weightings will have limited immediate impact on banks' capital position but could put additional pressure on margins, as high-yielding loans may move to the unregulated microfinance segment. In the longer term, consumer finance lenders in Russia face sluggish growth prospects given the high retail debt burden, market saturation and increasing competition from state banks, which have lower funding costs and stronger cross-selling potential. Credit losses - and therefore financial performance - are likely to remain highly cyclical. Fitch's report "Peer Review: Russian Consumer Finance Banks" is available at www.fitchratings.com or by clicking on the link above. Contact: Dmitri Vasiliev Director, Banks +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Alyona Plakhova Associate Director, Banks +7 495 956 2409 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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