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Fitch Rates Tinkoff's Upcoming Perpetual AT1 Notes 'B-(EXP)'
May 31, 2017 / 9:43 AM / 7 months ago

Fitch Rates Tinkoff's Upcoming Perpetual AT1 Notes 'B-(EXP)'

(The following statement was released by the rating agency) MOSCOW, May 31 (Fitch) Fitch Ratings has assigned TCS Finance DAC's upcoming issue of USD-denominated perpetual additional Tier 1 (AT1) notes an expected long-term rating of 'B-(EXP)'. These notes are to be used solely for financing a US dollar-denominated loan to Tinkoff Bank (Tinkoff). Tinkoff has a Long-Term Issuer Default Rating (IDR) of 'BB-' with Stable Outlook, a Short-Term IDR of 'B', a Viability Rating of 'bb-', a Support Rating of '5' and a Support Rating Floor of 'No Floor'. The amount of the issue is not yet defined, but according to management it should be within the USD150 million - USD300 million range. The notes will have no established redemption date. However, Tinkoff will have an option to repay the notes every five years after the first coupon reset date (in 2022) subject to the Central Bank of Russia's (CBR) approval. The final rating is contingent upon the receipt of final documents conforming to information already received. KEY RATING DRIVERS Fitch rates the bank's AT1 perpetual notes three notches lower than Tinkoff's 'bb-' VR, the maximum rating under Fitch's Global Bank Criteria that can be assigned to deeply subordinated notes with fully discretionary coupon omission issued by banks with a VR anchor of 'bb-'. The notching reflects (i) higher loss severity relative to senior unsecured creditors; and (ii) non-performance risk due to the option to cancel coupon payments at Tinkoff's discretion. The latter is more likely if the capital ratios fall in the capital buffer zone, although this risk is mitigated by Tiknoff's stable financial profile and general policy of maintaining decent headroom over minimum capital ratios. The upcoming subordinated notes should qualify as AT1 capital in regulatory accounts due to a full coupon omission option at Tinkoff's discretion and full or partial write-down in case either (i) Tinkoff's CET1 falls below 5.125% (versus 4.5% regulatory minimum); or (ii) the CBR approves a plan for the participation of the Deposit Insurance Agency (DIA) in bankruptcy prevention measures for the bank. Fitch believes the latter is possible as soon as a bank breaches any of its mandatory capital or liquidity ratios. Fitch estimates that depending on the issue size the bank's Tier 1 capital ratio should improve by about 3pts-6pts, providing extra capital flexibility in view of increasing capital buffers and recent CBR regulations further tightening the statutory risk-weights for high-rate consumer finance loans (although Fitch's preliminary assessment based on end-4M17 data suggests the impact will be moderate). The increased capital flexibility may allow for higher dividend payments, although Fitch believes the bank will maintain a reasonable buffer over the minimum capital requirements, supported by a strong internal capital generation capacity, as expressed by a high annualised return on average equity of 43% in 1Q17 (2016: 43%). Tinkoff's CET1 and Tier 1 capital adequacy ratios were both 8.9% at end-4M17. The required statutory minimums for Tinkoff, including a capital conservation buffer of 1.25%, currently equal, 5.75% and 7.25%, respectively. These minimum capital ratios will increase to 7% and 8.5% in 2019 once the capital conservation buffer is fully phased in. The countercyclical buffer also applies, but is currently 0%. Tinkoff is not included in the list of domestically systemically important banks and does not need to maintain a systemic importance buffer, which is currently 0.35% and will increase to 1% in 2019. RATING SENSITIVITIES The issue rating could be downgraded if Tinkoff's VR is downgraded, which is not expected by Fitch at present, given the Stable Outlook on Tinkoff's ratings. If the VR is upgraded to 'bb', the perpetual notes will be affirmed and the notching widened to four notches, in line with Fitch's criteria on rating hybrid capital instruments. Fitch may also widen the notching if non-performance risk increases, for example, if the bank fails to maintain reasonable headroom above the minimum capital adequacy ratios. If the bank cancels any coupon payment or at least partially writes off the principal, the issue will be downgraded based on Fitch's expectations about the form and duration of non-performance. Contact: Primary Analyst Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street, Moscow 115054 Secondary Analyst Alyona Plakhova Associate Director +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Date of relevant committee 26 May 2017 Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here 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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