November 1, 2017 / 4:13 PM / in a year

Fitch Takes Rating Actions on Four Russian Consumer Banks

(The following statement was released by the rating agency) MOSCOW/LONDON, November 01 (Fitch) Fitch Ratings has upgraded Home Credit and Finance Bank's (HCFB) Long-Term Issuer Default Ratings to 'BB-' from 'B+'; affirmed OTP Bank's Long-Term IDRs at 'BB' and upgraded its Viability Rating (VR) to 'bb-' from 'b+'. Fitch has affirmed Tinkoff Bank's Long-Term IDRs at 'BB-'. The Outlooks on the three banks are Stable. The agency has also downgraded Orient Express Bank's (OEB) Long-Term IDRs to 'CCC' from 'B-'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS IDRS and VRS The rating actions (except the downgrade of OEB) reflect the continued recovery of the Russian consumer finance market due to reduced credit losses on the back of tighter underwriting and economic recovery, and lower funding costs and improved profitability, which coupled with modest growth also supports capitalisation. At the same time, the ratings continue to capture the segment's volatile nature with potential asset quality risks stemming from borrowers' still high debt burdens and growing competition due to limited inflow of new borrowers. The upgrade of HCFB's IDRs to 'BB-' and OTP's VR to 'bb-' mainly reflects stronger earnings at both banks underpinned by lower credit losses and reduced funding costs, and improved capitalisation. The affirmation of Tinkoff's IDRs at 'BB-' reflects robust profitability metrics, continued improvement of asset quality, and healthy capital ratios, which are likely to be preserved given strong internal capital generation, which should offset high lending growth rates. The downgrade of OEB's IDRs to'CCC' mainly reflects Fitch's view that the quality of the bank's capital has weakened markedly following the merger with Uniastrumbank due to the latter's significant exposure to investment property, non-traded equities and risky corporate loans (together these amount to RUB33.9 billion or 122% of FCC), which may be a source of negative mark-to-market adjustments or impairment in the future. At the same time regulatory capitalisation is very tight, which coupled with the bank's loss making performance in regulatory accounts in 9M17 suggests that continued compliance with capital requirements (including increasing from next year capital conservation buffer) could be challenging without external support. In 1H17 the average retail credit losses of the four banks (defined as the increase in retail loans overdue above 90 days, plus write-offs, divided by average performing loans) declined to 8% from 10% in 2016 (19% in 2015), helped by reduced risk appetites, seasoning of older, weaker-quality loans and stabilisation of the operating environment. Credit losses were highest at OEB (14%) and moderate for Tinkoff (9%), OTP (7%) and HCFB (6%). The latter three banks' credit losses should remain within the single digit range, in Fitch's view. OEB's retail book asset quality is also likely to improve, but this may be offset by risks from the corporate book (35% of gross loans), as of the 20 largest exposures (accounting for over 60% of gross corporate loans) Fitch considers about half (RUB15 billion, or 0.6x FCC) to be high-risk. New lending volumes have been muted at most banks, with OTP's and HCFB's loan books contracting in 2016-1H17 by 19% and 9%, respectively, while recent growth at OEB was largely due to the merger with Uniastrumbank in 1Q17. Tinkoff was the only bank among peers reporting a rapid 40% growth in 2016-1H17, supported by strong internal capital generation. Improved asset quality metrics, along with declining funding costs, helped banks to strengthen bottom line results. Both Tinkoff and HCFB reported robust annualised ROAE of 46% and 31%, respectively, in 1H17, while OTP's more moderate 11% was mostly due to higher operating expenses. OEB reported 17% ROAE in 1H17, but it was largely due to one-off securities revaluation, while core earnings were negative after adjusting for this one-off gain and about 15% of accrued interest income that is not received in cash. OEB was also loss making in regulatory accounts in 9M17 due to sizeable impairment charges. Pre-impairment profitability is solid and significantly above credit losses at Tinkoff (22% of average performing retail loans in 1H17), OTP (13%) and HCFB (12%), allowing Tinkoff to absorb a sizeable 13pp increase in credit losses before becoming loss making, while safety margins were moderate 6pp and 7pp at HCFB and OTP, respectively. Cash-based pre-impairment profitability at OEB (excluding non-core earnings and non-collected accrued interest) was a low 6% of average performing loans in 1H17, which is significantly below 11% of NPLs originated during the period. Capitalisation remains strong at OTP, HCFB and Tinkoff with end-1H17 Fitch Core Capital ratios of 24%, 19% and 16%, respectively, supported by the banks' improved profitability and deleveraging (OTP and HCFB). OEB's capital position with a 12% FCC ratio is undermined by its sizeable exposure to investment properties (RUB12 billion, 0.4x FCC), high-risk loans (0.6x FCC), deferred tax assets (0.2x FCC) and illiquid equity investments (0.2x FCC). Regulatory capital ratios are lower at all banks (end-9M17 Tier 1 of 14.4%, 9.4% and 12.3% at Tinkoff, HCFB and OTP, respectively; minimum is 7.875% with buffers applicable from 2018), reflecting higher statutory risk weights for unsecured retail loans and higher operational risk charge. OEB's regulatory capitalisation is tight (total capital ratio of 9.7%, which is below the minimum level of 9.875% including the buffer effective from 2018). Coupled with its loss-making performance, this suggests the bank may need external support to remain compliant. The introduction of IFRS 9 will have a moderately negative effect on the capitalisation of all banks, except OTP, which has already created additional provisions, but Fitch believes these will be offset by banks' strong internal capital generation (except OEB). There are some contingent risks in case of HCFB related to sizeable 1.7x double leverage at the holding company level at end-1H17 (defined as the equity investments in subsidiaries divided by holdco equity) and in case of OTP due to RUB4.5 billion (0.2x FCC) exposure to sister microfinance company. However, Fitch believes these risks are moderate, as HCFB's holdco seems to have good market access and is likely to be able to refinance the debt without needing to upstream liquidity/capital from the bank. In case of OTP the risks are covered by the parent, which considers both the bank and the microfinance company as a single business. Funding and liquidity metrics are reasonable at all banks, underpinned by low reliance on wholesale debt and strong deposit collection capacity, although the latter is more vulnerable at OEB given the bank's weaker profile. All banks are funded mainly by retail deposits (60% - 80% of end-1H17 liabilities), which are price-sensitive, but have proven to be relatively sticky through the cycle, as the majority of these fall under the deposits insurance system. Liquidity buffers are reasonable at all banks, covering about 45%, 40% and 33% of total customer deposits, at Tinkoff, HCFB and OTP, respectively, and a somewhat lower 25% at OEB. SUPPORT RATINGS AND SUPPORT RATING FLOORS OTP's IDRs and Support Rating reflect potential support the bank may receive, if needed, from its parent bank, Hungary-based OTP Bank Plc. Fitch believes that the parent would have a high propensity to support OTP in light of its majority ownership (98%), high level of integration, common branding and reputational damage for the parent from a potential default of OTP. Tinkoff, HCFB and OEB's '5' Support Ratings reflect Fitch's view that support from the banks' shareholders, although possible, cannot be relied upon. The Support Ratings and Support Rating Floors of 'No Floor' also reflect that support from the Russian authorities, although possible given the banks' considerable deposit bases, cannot be relied upon due to the banks' small sizes and lack of overall systemic importance. Accordingly, the IDRs of Tinkoff, HCFB and OEB are based on their intrinsic financial strength, as reflected by their VRs. SENIOR UNSECURED AND SUBORDINATED DEBT RATINGS Fitch has affirmed Tinkoff's senior unsecured debt rating at 'BB-', in line with its Long-Term IDRs, reflecting Fitch's view of average recovery prospects, in case of default. The subordinated debt ratings of HCFB and Tinkoff are notched down one level from their VRs (the banks' VRs are in line with their IDRs), including (i) zero notches for additional non-performance risk relative to the VR, as Fitch believes these instruments should only absorb losses once a bank reaches, or is very close to, the point of non-viability; and (ii) one notch for loss severity, reflecting below-average recoveries in case of default. Fitch has also affirmed the rating of Tinkoff's perpetual additional Tier 1 notes at 'B-', three notches below the bank's VR. 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 reasonably mitigated by Tiknoff's stable financial profile and general policy of maintaining decent headroom over minimum capital ratios (core Tier 1 ratio was 9.8% at end-9M17 versus the minimum 6.375% with buffers applicable from 2018). RATING SENSITIVITIES OTP's IDR is sensitive to changes in Fitch's assessment of Hungarian OTP Bank Plc's propensity and ability to provide support to its Russian subsidiary. OTP's VR and HCFB and Tinkoff's ratings may come under pressure if there is renewed pressure on banks' asset quality and profitability, leading to capital erosion, but Fitch views this as unlikely in the near term. Upside potentials for Tinkoff and HCFB's ratings and OTP's VR are limited and would require a significant diversification of business and earnings, leading to a material decrease in exposure to the Russian consumer finance market. OEB's ratings could be further downgraded in case the bank has to create significant reserves against is high-risk and non-core assets, or if it asset quality metrics deteriorate further, leading to material capital erosion. Conversely, improvement of bank's profitability and asset quality metrics, while also bolstering capital ratios, would be credit positive. The rating actions are as follows: HCFB Long-Term Foreign- and Local-Currency IDRs: upgraded to 'BB-' from 'B+'; Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: upgraded to 'bb-' from 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Subordinated debt (issued by Eurasia Capital SA) Long-term rating: upgraded to 'B+' from 'B' Tinkoff Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB-'; Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: affirmed at 'bb-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt Long-term rating: affirmed at 'BB-' Subordinated debt (issued by TCS Finance DAC) Long-term rating: affirmed at 'B+' Hybrid capital instrument (issued by TCS Finance DAC) Long-term rating: affirmed at 'B-' OTP Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB', Outlooks Stable Short-Term Foreign-Currency IDR: affirmed at 'B' Viability Rating: upgraded to 'bb-' from 'b+' Support Rating: affirmed at '3' OEB Long-Term Foreign- and Local-Currency IDRs: downgraded to 'CCC' from 'B-' Short-Term Foreign-Currency IDR: downgraded to 'C' from 'B' Viability Rating: downgraded to 'ccc' from 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contacts: Primary Analyst Alyona Agrenenko Associate Director +7 495 956 2409 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Ilya Sarzhin Analyst +7 495 956 9983 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 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 Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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