OREANDA-NEWS. Fitch Ratings has revised the Outlook on Home Credit & Finance Bank's (HCFB) Long-Term Issuer Default Ratings (IDRs) to Stable from Negative and affirmed the IDRs at 'B+'. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRs AND VR

The revision of the Outlook reflects reduced downside risks to HCFB's capitalisation due to recent improvement in asset quality and consequently performance, which almost reached break-even in 1Q16, albeit partly due to the solid earnings of the Kazakh subsidiary. However, the 'B+' IDR continues to reflect the bank's focus on the risky and overheated Russian consumer finance market and therefore vulnerable asset quality and performance. On the positive side, the ratings continue to consider HCFB's reasonable capital and liquidity buffers.

HCFB's annualised credit losses (calculated as an increase in loans 90 days overdue (non-performing loans) plus write-offs, divided by the average performing loans) improved markedly to moderate 13%-14% in 1Q16-2H15 from a very high 23-24% in 1H15-2014. Fitch believes that the primary reason for asset quality improvement is HCFB's reduced risk appetite, reflected by reduced acceptance rates and more limited loan issuance (gross loans shrank by 7% in 1Q16 and 29% in 2015). Another reason for improvement is the ultimate maturity of most risky loans issued during 2012-2013 when HCFB was growing very fast with more relaxed loan approval criteria.

Fitch believes that credit losses could remain stable throughout 2016 or even slightly reduce, although there are still considerable downside asset quality risks stemming from the weaker economic environment. Consumer finance borrowers in Russia are highly leveraged and have small to average incomes, which have fallen in real terms due to high inflation and increasing living costs. However, in Fitch's view, these downside asset quality risks are largely captured by HCFB's relatively low 'B+' rating.

HCFB became slightly below break-even in 1Q16 (net loss of RUB0.2bn or 0.5% of end-1Q16 equity)) after reporting significant losses in 2015-2014. 1Q16 net results were boosted by around RUB0.5bn income from the Kazakh subsidiary, but this was offset by a RUB0.6bn FX loss from rouble appreciation, while HCFB's core retail business was profitable. We believe the bank will end 2016 with a small profit, assuming that credit losses remain stable at around 12%-13%. The longer-term performance is difficult to forecast due to the uncertain prospects for saturated consumer finance lending in Russia and competition, particularly from larger universal banks, which benefit from cheaper funding and stronger cross-selling potential.

Risks around capital have reduced along with gradual stabilisation of asset quality and performance. Capitalisation is reasonable with 15.9% Fitch Core Capital (FCC) ratio at end-1Q16. The regulatory Tier-1 capital ratio is much tighter at 7.7% (minimum 6.625% including capital conservation buffer) at end-April 2016, due to more stringent risk-weighting on consumer finance loans and sizeable operational risk component. However, the latter may gradually decrease in the next few years. Despite previous significant losses, HCFB managed to ease capital pressure in 2014-2015 by de-leveraging and selling of high-margin retail loans with prohibitively high risk-weights to related parties. Capital ratios are unlikely to drop in the near term due to the improved bottom line and limited growth prospects.

Funding and liquidity remains a rating strength. HCFB is funded with retail deposits (77% of end-1Q16 liabilities), which are very granular and rather stable (although price-sensitive) as around 90% of customers are covered by state deposit insurance. The nearest potential wholesale debt repayment is in 2018 due to put option on USD230m (8% of total liabilities) subordinated Eurobond issued followed by another put option on another subordinated Eurobond issue of USD165m (6% of total liabilities) in 2019. At end-April 2016, HCFB's liquidity buffer equaled a solid RUB38bn or 22% of total liabilities.

KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR

HCFB's '5' Support Rating reflects Fitch's view that support from the banks' shareholders, although possible, cannot be relied upon. The Support Rating and Support Rating Floors of 'No Floor' also reflect the fact that support from the Russian authorities, although possible given HCFB's considerable deposit base, cannot be relied upon due to HCFB's still small size and lack of overall systemic importance. Accordingly, the HCFB's IDRs are based on its intrinsic financial strength, as reflected by its VR.

KEY RATING DRIVERS - SUBORDINATED DEBT

HCFB's subordinated debt ratings are notched down once from its VR, in line with Fitch's criteria for rating these instruments.

RATING SENSITIVITIES

HCFB's IDRs remain highly sensitive to asset quality, performance and capital. Downside pressure on the ratings would stem from renewed asset quality deterioration if it leads to significant bottom line losses and erodes HCFB's capital buffer. An upgrade of HCFB's ratings would probably require an improvement in economic environment. However, significant progress in further asset quality and profitability strengthening, along with gradual pick up in loan growth would be credit positive.

HCFB's Support Rating could be upgraded and the Support Rating Floor revised if HCFB's systemic importance markedly increases but Fitch views this as highly unlikely.

The rating actions are as follows:

HCFB

Long-Term foreign and local currency IDRs: affirmed at 'B+'; Outlooks revised to Stable from Negative

Short-Term foreign currency IDR: affirmed at 'B'

Viability Rating: affirmed at 'b+'

Support Rating: affirmed at '5'

Support Rating Floor: affirmed at 'No Floor'

Subordinated debt (issued by Eurasia Capital SA) Long-term rating: affirmed at 'B', Recovery Rating 'RR5'