S&P: Outlook On Cyprus-Based Ronin Europe Revised To Positive On Improving Business Diversification; 'B+/B' Ratings Affirmed
The outlook revision reflects that we believe Ronin Europe, the core subsidiary of Ronin Partners B. V. (Ronin or the group), benefits from the group's ongoing business diversification into new business lines, such as asset management, and its gradual shift of operations outside of Russia.
The group has diversified revenues over the past two years by increasing revenues from assets under management (primarily from pension funds of the mandatory defined contribution plans). Asset management revenues, which we view as generally more stable than trading or transaction-based revenues, reached over 40% in 2015, and we expect they will exceed 30% on a sustained basis (compared with less than 15% over the 2012-2014 period). Revenues remain concentrated, however, on a limited set of very large clients. Ronin remains one of the most efficient companies within its peer group, with an average cost-to-income ratio of about 25% over the past five years and high returns on S&P Global Ratings' risk-weighted assets exceeding 6% in 2015.
Ronin is relatively more diversified internationally from a risk perspective than many local peers, with most clients' assets outside Russia and fewer direct exposures to Russian risk on the balance sheet than most peer Russian securities firms.
We note that historically Ronin Europe has maintained a conservative approach with regards to segregation of clients' assets, with only a handful of accounts operating under title transfer collateral agreements, which resulted in historical low leverage. The company's relatively conservative approach to proprietary positions resulted in a very high risk-adjusted capital ratio of more than 80% in 2015, one of the highest capital ratios among the securities firms we rate worldwide. We understand that currently most cash is maintained outside Russia, with Euroclear and JP Morgan, and we not expect any changes in this respect going forward.
The positive outlook on Ronin Europe reflects the gradual diversification of the company and of its parent, Ronin Partners B. V., from a business perspective, as well as its adherence to sound financial standards, which we expect it will maintain over the next 12-18 months.
We may upgrade Ronin Europe if the group reduces its dependence from the Russian market and clientele, while maintaining sound financial standards with respect to liquidity and capital, as well as a conservative approach toward risk management.
We could revise the outlook to stable if the group substantially increases its risk appetite, and adopts more aggressive growth strategies that could lead to a material drop in profitability and capitalization, or does not maintain its business diversification. We could also revise the outlook to stable if the Russian economy and operating environment deteriorate. Lastly, we might lower the ratings if we believe Ronin Europe's core status for its parent company had weakened, for example due to reduced operations.