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Fitch Rates Russia's Sovcombank 'B+'; Outlook Stable
July 17, 2014 / 3:32 PM / 3 years ago

Fitch Rates Russia's Sovcombank 'B+'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW/LONDON, July 17 (Fitch) Fitch Ratings has assigned Russia's Sovcombank (SCB) a Long-term Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS - IDRS, VIABILITY RATING, NATIONAL LONG-TERM RATING SCB's ratings reflect (i) its short track record in the Russian consumer finance market; (ii) the challenging outlook for Russian consumer finance banks given increasing borrower leverage and rising arrears; (iii) potentially significant volatility in the bank's performance and asset quality, which are largely untested through the negative side of the economic cycle; (iv) significant dependence of pre-impairment profitability on loan issuance volumes; and (v) fairly high exposure to market risk. However, the ratings also reflect SCB's currently adequate asset quality, sound liquidity and reasonable capitalisation, and its somewhat more conservative credit underwriting relative to peers. SCB's non-performing loans (NPLs, 90 days overdue) origination rate (defined as net increase in NPLs plus write-offs) remained a moderate 11% (annualised) of average performing loans in 3M14, only slightly up from 10.7% in 2013. This compares well with peers, as sector average credit losses were a high 15.5% in 2013 and continued to creep up in the beginning of 2014. SCB's results seem to have been only mildly affected by negative market trends so far, in part due to the bank's somewhat different client focus and significantly smaller loan tickets (around RUB60,000 on average, well below its peers). However, operating conditions for the Russian consumer finance sector in general, and SCB in particular, remain challenging, as expressed by sizeable uplift in credit losses in the sector in 2013, driven by the growing leverage of Russian retail borrowers. In Fitch's view, SCB's track record of reasonable asset quality and performance in a more challenging operating environment is limited. Despite solid performance in 2011-2013 (average ROAE equalled a high 44%), SCB posted a RUB0.1bn operational loss in 1Q14, net of one-off items related to the acquisition of GE Money Bank (GEMB; equal to roughly 24% of SCB's end-2013 total assets). SCB's core profitability is heavily dependent on loan issuance volumes as a high 69% of its pre-impairment profit in 3M14 (2013: 65%) was derived from insurance agency fees. These fees are recognised upfront at loan origination and are directly tied to the amount of issued loans. Hence, the loan growth slow-down and lengthening of loan tenors (both anticipated by Fitch in the near term) may affect SCB's profitability in a negative manner. Zero loan growth in 3M14 resulted in Fitch's estimated break-even NPL origination rate going down to 12.3%, only marginally above actual credit losses. In Fitch's view, it will be difficult for SCB to achieve fast loan growth in the current environment while maintaining acceptable asset quality. SCB's capitalisation is reasonable, with a Fitch Core Capital (FCC) ratio of 14% at end-1Q14, and has historically been underpinned by sound internal capital generation (37% on average in 2011-2013). A significant discount to book value on the acquisition of GEMB should also be positive for capitalisation, conditional on (i) successful implementation of ongoing integration, (ii) the good quality of GEMB's loan book, and (iii) manageable one-off acquisition-related expenses. SCB is predominantly funded by retail deposits (64% of end-1Q14 liabilities). The granularity of SCB's deposit base is positive for funding stability. However, the high share of retail deposits in the funding mix, combined with the bank's secured repo funding, could negatively affect recoveries for senior unsecured creditors, as under Russian law their claims rank below those of retail depositors. A high 23% of end-1Q14 liabilities were comprised of repo funding from the Central Bank of Russia (CBR). The proceeds are used to purchase additional bonds eligible for further repoing with the CBR and earn a margin of around 2% between the CBR repo rate and the yield on the securities portfolio. This results in high holdings of fixed income securities (3.5x FCC at end-1Q14) and, notwithstanding reasonable credit quality, exposes the bank to significant market risk. The bank's strong liquidity position is underpinned by (i) the solid cushion of liquid assets at end-5M14 (equal to 27% of total customer accounts); and (ii) the fast amortising, granular and cash generative loan book (monthly proceeds from loan repayments equal to about 5% of customer accounts) RATING SENSITIVITIES - IDRS, VIABILITY RATING, NATIONAL LONG-TERM RATING Upside pressure on SCB's ratings could stem from (i) an extended track record of reasonable performance and asset quality through the cycle; and (ii) the gradual recovery of the operating environment. Significant deterioration of SCB's asset quality and/or liquidity position would put downward pressure on the bank's ratings. KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR The Support Rating of '5' reflects Fitch's view that support from the bank's private shareholders cannot be relied upon. Potential sovereign support is also not factored into SCB's ratings (as expressed in the Support Rating Floor of 'No Floor') due to SCB's low systemic importance. The rating actions are as follows: Long-term foreign and local currency IDRs: assigned at 'B+'; Outlook Stable Short-term foreign currency IDR: assigned at 'B' National Long-term rating: assigned at 'A(rus)'; Outlook Stable Viability Rating: assigned at 'b+' Support Rating: assigned at '5' Support Rating Floor: assigned at 'No Floor' Contacts: Primary Analyst Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya St, Moscow 115054 Secondary Analyst Konstantin Yakimovich Associate Director +7 495 956 9978 Committee Chairperson James Watson Managing Director +7 495 956 66 57 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available on Applicable criteria, 'Global Financial Institutions Rating Criteria' dated 31 January 2014, are available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here 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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