Fitch: Home Credit's 1Q14 Results Increase Downward Pressure on Ratings

Tue Jun 3, 2014 9:34am EDT

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(The following statement was released by the rating agency) MOSCOW/LONDON, June 03 (Fitch) Fitch Ratings says that downward pressure on Home Credit & Finance Bank's (HCFB, BB/Negative/bb) ratings has increased following the bank's 1Q14 results, and continued weak performance in 2014 will likely result in a downgrade. However, HCFB's credit profile remains supported by solid capital and liquidity buffers, and improved profitability in future quarters could still help the ratings to stabilise at their current levels. HCFB reported a RUB3.3bn loss in 1Q14 (equivalent to 6% of end-2013 equity), compared with a RUB3.5bn profit in 1Q13 and a RUB1.7bn profit in 4Q13. The weak results were mainly driven by a rise in credit losses and, to a lesser extent, a decrease in fee income. Fitch revised the Outlook on the bank's ratings to Negative on 22 April 2014, anticipating continued deterioration of performance in 2014. However, the magnitude of losses in 1Q somewhat exceeded our expectations. Credit losses (defined as the net increase in NPLs plus write-offs divided by average performing loans) surged to a high 22% (annualised) of average performing loans in 1Q14 (17% in 2013), exceeding the estimated break-even loss rate of about 17%. The main reason was the weaker quality of loans issued in the boom cycle of 2H12-1H13, when banks competed on volumes and relaxed underwriting standards. These vintages still comprise a substantial share of outstanding loans in the bank's portfolio, and continue to generate losses, notwithstanding the significant time elapsed since origination. There is also a lower denominator effect due to moderate contraction of the loan book (4% in 1Q14). Positively, the performance of loans issued more recently under tighter guidelines has been somewhat better, although the sustainability of this trend in a tougher operating environment is yet to be confirmed. There was also some pressure on the revenue side in 1Q14, with a 23% q-o-q drop in insurance-related fees (accounting for 30% of pre-impairment profit in 1Q14), which are recognised up-front, upon loan origination. Fee volumes are not likely to rebound in 2014, as Fitch expects the bank to maintain around zero loan growth during the year. New legislation limiting maximum interest rates may also pressure revenues, making performance improvement more challenging to achieve and highly dependent on better asset quality. Capitalisation is still reasonable, with the Fitch core capital and total regulatory capital ratios standing at 13.8% and 14.8%, respectively, at end-1Q14. Reserve coverage of NPLs in the IFRS accounts was a high 1.2x, indicating moderate ability to provision further NPLs without eating into capital. Liquidity is a rating strength, due to the large available liquidity buffer (equal to 18% of end-1Q14 liabilities), fast loan turnover, and the granular and so far stable retail deposit base (notwithstanding a moderate 6% outflow of retail customer funding during 4M14, also reflecting lower funding needs). Refinancing risk is low, with remaining 2014 repayments limited to a RUB5bn local bond in June (equal to less than 2% of liabilities) following the repayment of a USD500m Eurobond in March. Contacts: Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings Moscow Valovaya Str, 26 Moscow Konstantin Yakimovich Associate Director +7 495 956 9901 Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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