Under our bank criteria, we use our Banking Industry Country Risk Assessment's economic and industry risk scores to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for a commercial bank operating only in Russia is 'bb'. Russia's economic risk score is '7'. This reflects Russia's only moderate growth prospects, the moderate pace of credit expansion, the economy's moderate debt levels, and very high credit risk in the economy due to foreign currency lending, the poor credit standing of the nonexport economy, and Russia's weak and arbitrary legal system.
The industry risk score is '7'. This is based on deficiencies in Russia's bank supervision; the dominance of state-owned banks, which unfavorably distorts competition for private sector banks; and the risky bank funding markets characterized by a lack of long-term financing in rubles and prevalent use of foreign currency. Nonetheless, bank funding has improved since 2008 due to a significant increase in retail deposits and the Central Bank of Russia's (CBR's) regular and effective liquidity support operations.
Business position: Leading positions in credit cards business in Russia RSB's business position is "moderate", in our view, reflecting its business concentration on consumer finance. With total assets of Russian ruble (RUB) 222.7 billion (about $7 billion) on June 30, 2012, RSB ranks 23rd among the top Russian banks. RSB was a pioneer in the Russian consumer finance market and currently holds the No. 2 position in the credit card market, after Sberbank, with a market share of 16.4%. RSB also holds the fourth-largest market share in Russian point-of-sale (POS) lending, at 11.6%.
The bank has a client base of about 25 million retail customers and operates through a wide distribution network with 237 branches, more than 57,000 points of sale, and over 4000 ATMs. RSB covers 56 Russian regions and about 90% of the Russian population in 84 cities. Currently the bank is developing new distribution channels, including Internet and mobile banking and instant payment terminals. It also holds leading positions in the acquiring business.
In our view, the consumer finance business model is rather volatile and subject to changes in the operating environment. After a period of tough market conditions in 2008-2010, including loan-book shrinkage, RSB experienced lending growth of 36% in 2011 and 25% in the first half of 2012. We believe the bank's growth for 2012 will exceed 50%, which is higher than market average. For the following years, RSB targets lower annual growth rates of about 25%, mainly focusing on the credit card segment.
We assess RSB's business strategy and risk appetite as more aggressive than the Russian banking industry average, shown by higher returns on equity, particularly during the expansion period. Moreover, the bank's consumer finance business might be subject to tightening regulation and legal framework. Because RSB's strategic decision-making is concentrated in the hands of its beneficial shareholder, Russian businessman Roustam Tariko, we see potential governance risks typical for private banks in Russia. These refer to the dividend policy and strategy regarding bonds issued by vodka producer Central European Distribution Corp. (CEDC; 19.5% beneficially owned by Roustam Tariko through Roust Trading Ltd) that RSB has on its balance sheet.
Capital and earnings: High loan growth and dividends payouts conducted constrain capitalization
We assess RSB's capital and earnings as "moderate", which is a neutral rating factor for a bank with a 'bb' anchor, and reflects pressure on capitalization coming from high loan growth and dividend payouts. The risk-adjusted capital (RAC) ratio before diversification stood at 5.10% at year-end 2011, decreasing from 5.74% at year-end 2010 due to high loan growth and dividend payouts. We project this ratio to be at about 5.0%-5.5% within the next 12-24 months, assuming retained earnings recapitalization, 50% loan growth by the year-end 2012, and further annual growth of 25% in 2013-2014.
This projection takes into account adjustments for RUB6.5 billion invested in shares of the parent company, which are deducted from equity for our calculation of total adjusted capital. According to the bank, it might consider converting its RUB5 billion subordinated debt from the parent into Tier 1 capital to support its core capitalization. However, we don't factor this into our assessment as this is not yet confirmed yet. The bank didn't plan to pay any significant dividends as of year-end 2012, targeting retained earnings recapitalization. However, its further dividend policy for 2013 is not yet set up and will depend on the bank's profitability results.
As of Dec. 1, 2012, RSB's regulatory CAR amounted to 14.2%, including two subordinated loans of RUB5 billion each, from the parent company and Vnesheconombank (foreign currency BBB/Stable/A-2; local currency BBB+/Stable/A-2), maturing in 2039 and 2019, respectively. Also, in October 2012, RSB successfully placed a $350 million subordinated Eurobond with a maturity of 5.5 years, and later that year received the CBR's permission to include this issue in the CAR calculation.
The bank's earnings capacity is strong, in our view, given its high net interest margin of 16.9% as of July 1, 2012, due to a focus on consumer finance business. The cost-to-income ratio is gradually decreasing. The bank's good earnings generation capacity is also underpinned by growth in commissions income due to the acquiring business and money transferring services, as well as income from insurance operations. Our forecast three-year average earnings buffer is 2.5%, meaning that the bank can withstand our projected normalized credit losses thanks to good earnings generation capacity.
Risk position: Higher credit costs typical for consumer finance business amid rapid loan growth
We assess RSB's risk position as "moderate", given its concentration on consumer lending, with credit costs higher than the system average, and recent rapid loan growth.
The bank's credit costs increased in the first half of 2012, totaling an annualized 7.6% of customer loans, following active loan growth, an increase in overdue loans, and changes in collection procedures. Nonperforming loans (NPLs) to total loans increased to 5.18% in the first half of 2012 compared with 4.55% at year-end 2011. Net charge-offs amounted to 4.26% (5.11% at year-end 2011). The bank aims to keep its NPL coverage ratio at about 140%-160% in the future. Following some worsening of its asset quality indicators, the bank has tightened its underwriting procedures. We expect credit costs to stabilize at about 7% for the next few years amid the targeted 25% annual loan growth. This high loss charge is compensated by a high net interest margin (16.9% as of July 01, 2012) for consumer lending, in our view.
The bank also bears foreign currency risk, given that 23% of liabilities are denominated in foreign currencies while most assets are in rubles hedged by foreign currency swaps. We also take into consideration risks regarding CEDC bonds amounting to RUB4.8 billion (30% of adjusted total equity) on the bank's balance sheet as of Oct. 1, 2012. The bank claimed that this exposure will be reduced from the bank's balance in the near future.
Funding and liquidity: Diversified funding base with continuously increasing customer deposits
RSB's funding is "average" and liquidity is "adequate", in our view.
The bank has significantly reduced its dependence on wholesale borrowings since 2009, and its core customer deposits continue to increase, including 30% growth in the first half of 2012 and 64% in the full year 2011. We expect deposit collection to remain dynamic in 2013, owing to increasing wealth in Russia, RSB's dense network, and its good retail franchise. The bank's funding is currently composed of: 68% customer deposits, 22% wholesale debt, and 10% interbank deposits. The loan-to-deposit ratio improved to 105% as of June 30, 2012, and we expect it to remain stable in 2013. With a high proportion of retail deposits, the funding base could be volatile to panic-led customer behavior. Upcoming wholesale debt repayments in 2013 include a $150 million Euro commercial papers issue due in April 2013, which is likely to be refinanced; and three put options for three issues of domestic bonds of RUB5 billion each.
The current liquidity cushion of RUB18 billion cash and cash equivalents is ample to cover upcoming debt repayments, in our view. Apart from cash and money market instruments, the bank holds a sizable amount of liquid securities eligible for repo (at about 15% of total assets). RSB's stock of liquid short-term securities and the short-term nature of its loans mitigate refinancing risks, in our view.
External support: No rating uplift, due to the bank's low systemic importance in a supportive regime
The counterparty credit rating reflects RSB's SACP and includes no uplift for extraordinary external support, either from the shareholders or the government.
Additional rating factors: None
No additional factors affect this rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
-- Group Rating Methodology And Assumptions, Nov. 9, 2011
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Bank Hybrid Capital Methodology And Assumptions, Nov. 1, 2011
-- Bank Capital Methodology And Assumptions, Dec. 6, 2010