(Repeat for additonal subscribers)
April 24 (The following statement was released by the rating agency)
Fitch Ratings has assigned Kazakhstan-based Subsidiary Bank Joint-Stock Company Home Credit and Finance Bank (HCK) a Long-term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook. A full list of rating actions is at the end of this comment.
KEYRATING DRIVERS - IDRS, NATIONAL RATING AND SUPPORT RATING
The Long-term IDRs, National Rating and Support Rating reflect the moderate probability of the bank receiving support in case of need from its parent, Russia's Home Credit and Finance Bank (HCFB, 'BB/Stable; bb').
Fitch's view on the probability of support is based on the bank's full ownership by HCFB, its small size relative to the parent (HCK accounts for 5% of HCFB's assets, limiting the cost of any potential support) and reputational risk for HCFB in case of the bank's default.
The one-notch difference between HCFB and HCK's ratings reflects the cross-border nature of the parent-subsidiary relationship, HCK's so far limited track record of operations and some uncertainty about the long-term commitment of HCFB to support HCK in case of a prolonged deterioration of the operating environment in Kazakhstan.
RATING SENSITIVITIES - IDRS, NATIONAL RATING AND SUPPORT RATING
Any positive or negative action on the parent's Long-term IDRs would likely be matched by a similar action on HCK's Long-term IDRs. This would also impact the National Rating and could result in a change in the Support Rating.
KEY RATING DRIVERS - VIABILITY RATING (VR)
The VR of 'b' reflects the bank's currently solid capitalisation, strong profitability and adequate asset quality. At the same time, the VR is constrained by the bank's still short track-record of healthy performance and limited franchise, higher than average sensitivity to macroeconomic shocks, tight liquidity and weak funding profile reflected in high single-name concentrations and dependence on parent facilities.
HCK is a wholly-owned subsidiary of HCFB, which in turn is the part of a broader Home Credit Group (Home Credit B.V. ) with activities in CEE, CIS and Asia. The group is in turn majority-owned by PPF Group N.V., an industrially diversified holding company controlled by Czech businessman Peter Kellner.
HCK is a small but rapidly growing (110% loan growth in 2012) retail bank that focuses on issuing point-of-sale and cash loans to lower mass-market customers. As with other mass-market retail lenders, this makes the bank sensitive to macroeconomic fundamentals due to the relatively low financial flexibility of its borrowers.
HCK's asset quality is currently adequate. NPLs (non-performing loans; 90 days overdue) increased to a still moderate 5% at end-2012 from 2.8% at end-2011 with NPL generation reaching 7.7% of average performing loans in 2012 as the bank tapped higher risk clientele. Fitch expects credit losses to further increase as HCK leverages up its borrowers with longer-term larger-ticket cash loans, growth moderates and the rapidly acquired portfolio seasons. However, the wide interest margin (26% in 2012) and significant loan-related insurance commission (equal to 54% of pre-impairment profit in 2012) offer considerable flexibility to absorb losses, and Fitch estimates the current break-even loss rate to be around 31% of average loans. At the same time, Fitch notes that insurance commissions are recognised upfront at loan origination, and as portfolio growth slows down bank's profitability is likely to moderate significantly and the break-even loss rate would also be lower.
HCK is currently reliant on funding provided by the group (37% of liabilities at end-2012) and non-core corporate deposits (35% of liabilities at end-2012). The latter are highly concentrated with the largest five accounting for 28%, and the largest one 14%, of end-2012 liabilities.
Liquidity is currently tight with liquid assets equal to only 9% of liabilities at end-January 2013. Mitigating deposit withdrawal risk to an extent, HCK's quickly amortising loan book generates KZT6bn of monthly repayments (equal to 11% of end-January 2013 liabilities). Management plans to reduce the bank's reliance on parent's funding and corporate deposits by attracting wholesale debt and shifting its focus to retail deposits. However, given its currently modest franchise, HCK has yet to prove that it can attract and retain retail depositors.
The current capital position is solid, with a Fitch core capital ratio of 32% at end-2012 (28% at end-2011). However, capitalisation is likely to decline as internal capital generation (43% in 2012), although high, is significantly below expected loan growth rates. Further capital weakening could follow when the bank starts paying dividends.
RATING SENSITIVITIES - VR
An extended track record of sound performance and growth supported by a more diversified funding base would be positive for the standalone profile. A significant deterioration of the operating environment in Kazakhstan, or weaker performance of the loan book would be negative and could lead to downward pressure on the VR.
The rating actions are as follows:
Long-term foreign currency IDR: 'BB-'; Outlook Stable
Short-term foreign currency IDR: 'B'
Long-Term local currency IDR: 'BB-'; Outlook Stable
National Long-Term Rating: 'BBB+(kaz)'; Outlook Stable
Viability Rating: 'b'
Support Rating: '3'