Fitch Revises Outlooks on Russia's Home Credit and Finance Bank
OREANDA-NEWS. Fitch Ratings has revised the Outlook of Russia-based Home Credit and Finance Bank (HCR) and its Kazakh subsidiary, SB JSC Home Credit and Finance Bank (HCK), to Negative from Stable. Their Long-term Issuer Default Ratings (IDRs) have been affirmed at 'BB' and 'BB-', respectively.
The revision of the Outlook on HCR's Long-term IDRs reflects the weakening operating environment in Russia and its potential further negative impact on the bank's performance. The Outlook also considers the already challenging operating conditions for the Russian consumer finance sector in general and HCR in particular, as portfolio seasoning and higher household leverage have caused credit losses to widen significantly. At the same time, the ratings remain supported by HCR's considerable resilience against potential shocks, given its high margins, solid capital buffer and strong liquidity.
HCR's credit losses - defined as non-performing loans (NPLs, 90 days overdue) originated in the period divided by average performing loans - increased to 17% in 2013 from 14% in 1H13 and 10% in 2012. Positively, vintage analysis suggests the quality of 2H13 loan generations improved moderately, as HCR tightened its underwriting standards and focused on lower-risk clients. However, the sustainability of this trend is yet to be tested, and risks remain on the downside given expected sluggish performance of the Russian economy this year. HCR may also find it challenging to compete for better-quality borrowers with larger corporate banks which target the same clientele, but may offer lower rates and larger loan tickets.
Further significant deterioration of HCR's asset quality and/or profitability amid a more challenging operating environment could lead to a downgrade. Conversely, the stabilisation of performance and gradual recovery of asset quality metrics could lead to the Outlook being revised to Stable.
The SRF of 'No Floor' reflects that support from the Russian authorities, although possible given HCR's significant RUB212bn deposit base, is not factored into the ratings due to the bank's still small size and lack of overall systemic importance. Although there is some track record of support from HCR's private shareholders future support cannot be relied upon.
HCK's Long-term IDRs are driven by support the bank could receive from its parent, HCR. The revision of the Outlook on HCK's ratings reflects the revision of the Outlook on HCR. Fitch's view of the probability of support is based on HCK's increasing importance for the parent (it accounted for 24% of HCR's consolidated earnings in 2013) and still small size (less than 7% of HCR's assets at end-2013), making it fairly easy to support. Fitch's view also takes into account HCR's full ownership, common branding and reputational risk for HCR in case of HCK's default.
The one-notch difference between HCR's and HCK's ratings reflects the cross-border nature of the parent-subsidiary relationship, HCK's so far limited track record of operations, and some uncertainty about the long-term commitment of HCR and the broader Home Credit group to support HCK in case of a prolonged deterioration of the operating environment in Kazakhstan.
Any negative action on the parent's Long-term IDRs would likely be matched by a similar action on HCK's Long-term IDRs. This would also impact the National Rating and could result in a change in the Support Rating.
An extended track record of sound performance and growth supported by a more diversified funding base would be positive for the standalone profile. A significant deterioration of the operating environment in Kazakhstan, or weaker performance of the loan book diminishing HCK's ability to absorb further losses would be negative and could lead to downward pressure on the VR.
The banks' senior unsecured debt is rated in line with their Long-term IDRs, reflecting Fitch's view of average recovery prospects, in case of default. The (new style) subordinated debt rating of HCR is notched once off its VR (which is in line with its Long-term IDRs) in accordance with Fitch's criteria for rating these instruments. Any changes to the banks' Long-term IDRs would likely impact the ratings of both senior unsecured and subordinated debt.