(The following statement was released by the rating agency)
Oct 12 - Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Russia's Home Credit and Finance Bank (HCFB) at 'BB-', and thereby resolved the Rating Watch Positive (RWP) on the ratings. The Outlook is Stable. Fitch has also assigned a 'B+(exp)' rating to the bank's upcoming subordinated debt issue. A full list of rating actions is at the end of this commentary.
RATING ACTION RATIONALE
Fitch placed HCFB's ratings on RWP on 23 May 2012, reflecting the view that the bank's stand-alone credit metrics warranted a higher rating than the 'BB-' level. However, the agency stated that it would complete an analysis of PPF group, the controlling shareholder of the bank, and the benefits and risks for HCFB of being a member of the group, before taking a final decision on the appropriate level of HCFB's ratings. (See 'Fitch Places Home Credit and Finance Bank on Rating Watch Positive'.)
In Fitch's view, HCFB's stand-alone metrics continue to warrant a rating of 'BB', one notch higher than the current level. However, the agency has affirmed the bank at 'BB-' because of potential risks arising from the investments and leverage of the broader PPF group, and from one large outstanding funding facility in particular.
Fitch's assessment of HCFB's stand-alone profile continues to reflect the bank's strong profitability, currently comfortable capitalisation and liquidity, satisfactory through-the-cycle asset quality performance, strong expertise and franchise in consumer lending and reduced refinancing risks. At the same time, asset quality and performance are likely to weaken somewhat after recent rapid loan growth both at HCFB and in the consumer finance segment as a whole, and tier 1 and core capital ratios will probably moderate as the planned subordinated debt issue is used to fund further expansion.
HCFB's loan book grew by a rapid 32% (unannualised) in H112, following a 49% increase in 2011. This was accompanied by a moderate weakening of asset quality, with origination of non-performing loans (NPLs, defined as loans overdue more than 90 days) climbing to 9.3% (annualized) of performing loans in H112 from 7.8% in 2011. Fitch expects further moderate weakening of asset quality as the loan book seasons following a rapid build-up in overall household leverage in Russia. However, HCFB's generally sound underwriting policies, and extensive experience in the Russian consumer finance segment, should enable it to avoid any sharp increase in delinquency rates.
The end-H112 NPL-to-gross loans ratio was a reasonable 6%, and reserve coverage of NPLs was a sound 135%. Furthermore, the wide net interest margin (20% in H112) and strong operational efficiency (cost/income ratio of 34%) offer significant flexibility to absorb losses. Fitch estimates the break-even loss rate to be about 23% (annualized) of loans.
Overall, HCFB's performance is robust (ROAA of 7.2% in H112), albeit reducing slightly due to growing impairment charges and funding costs. However, profitability may come under increasing pressure as a result of the expected entry of state-owned banks into point-of-sale lending, the key client acquisition channel for HCFB, as well as potential greater regulatory intervention, as the authorities become increasingly concerned about the buoyant growth of unsecured retail lending in Russia (see 'Fitch: Russia Bank Reserves Increase Shows Central Bank Concern' of 26 September 2012).
Capitalisation has moderated as a result of recent rapid growth and significant RUB16bn dividend payments in 2011-H112, which may be connected to the acquisition of assets by PPF, including a 50% stake in a Russian electronics retailer Eldorado for USD250m. However, the Fitch core capital was still a sound 16.6% at end-H112. Fitch believes internal capital generation should help to prevent any marked deterioration in capital ratios in the near term, unless NPLs increase sharply or HCFB makes further large dividend payments. The latter are not planned at the moment, according to management, and the upcoming subordinated debt placement is aimed to support growth. However, because of its ownership by a private equity group, dividends may be lumpy, depending on the group's investment needs.
HCFB is mostly retail funded (67% of total liabilities at end-H112), and liquidity risk relates mainly to potential instability of deposits. Mitigating this risk, the bank has a strong deposit collection capacity due to its wide regional branch network and ability to offer competitive deposit rates to retain customers. Also, the liquidity buffer, consisting of cash and unpledged bonds eligible for refinancing with the Central Bank of Russia, remains, on average, about 20% of customer deposits, which appears adequate in the context of the RUB10bn upcoming repayments of domestic bonds in Q412-H113. The short-term loan book, with monthly loan repayments of approximately RUB17bn (equal to 10% of liabilities) further supports the liquidity position.
Fitch views overall leverage at PPF (consolidated assets of EUR14.4bn, equity of EUR4.3bn at end-2011) as reasonable in the context of HCFB's current rating level. However, the agency views leverage as potentially quite volatile and dependent on the investment opportunities and strategy of the group. In addition, PPF's performance outside of HCFB appears to be quite weak, with total group net income in 2011 of EUR216m marginally lower than that in HCFB alone (EUR258m).
Fitch is particularly concerned about a large EUR2.1bn syndicated loan (an amount roughly equal to the group's total liquid assets at end-2011), secured by a pledge of PPF's 49% stake in Generali PPF Holding B.V. (GPPF), an insurance joint venture with Assicurazioni Generali SpA (Generali; 'BBB+'/Negative). In Fitch's view, there are some risks attached to the strategy for repayment of the loan upon maturity in January 2015, and also some uncertainty as to the conditions under which the facility may potentially be accelerated. Fitch understands that PPF has a right to sell the stake in GPPF in July 2014, and Generali may have an incentive to acquire it, but the ability of the latter to complete the purchase is uncertain.
HCFB could be upgraded if the bank's performance, asset quality and capitalization remain sound, and Fitch is able to gain greater comfort in respect to overall group leverage and potential risks attached to the syndicated loan facility, in particular.
The ratings could come under downward pressure if performance or capitalisation deteriorate sharply as a result of an unexpected, marked increase in loss rates or further substantial dividend payments. A reduction in the group's overall financial flexibility, potentially resulting in distributions of capital and/or liquidity out of HCFB, could also result in a downgrade.
The rating actions are as follows:
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 rating: affirmed at 'BB-' Subordinated debt rating: assigned at 'B+(exp)' Contact: Primary Analyst Anton Naberoukhin Associate Director +7 495 956 9901 Fitch Ratings Moscow Gasheka Street, 6 Moscow 125047 Secondary Analyst Alexander Danilov Senior Director +7 495 956 2408 Committee Chairperson James Watson Managing Director +7 495 956 6657
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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria, "Global Financial Institutions Rating Criteria", dated 16 August 2011is available at
. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria