ACRA affirms А(RU) to Tinkoff Bank, outlook Stable, А(RU) to ruble bonds, and BB+(RU) to subordinated Eurobonds

The credit rating of Tinkoff Bank (hereinafter, Tinkoff, or the Bank) at A(RU) is based on the Bank’s adequate business profile, strong capital adequacy, satisfactory risk profile, and adequate liquidity and funding position. The Bank is characterized by a moderately high creditworthiness level compared to other credit institutions in the Russian Federation.

Tinkoff Bank (formerly Khimmashbank) was acquired in 2006 by Russian entrepreneur Oleg Tinkov. Starting in 2007, it operated under the name Tinkoff Credit Systems and was renamed Tinkoff Bank in 2015. Currently, the Bank is among the 20 largest Russian banks in terms of capital. The Bank’s main business activities are consumer lending to individuals, mainly through credit cards, as well as providing a wide range of financial services through its online platform. The Bank’s strategy involves developing a digital ecosystem that includes both banking and non-banking products. The Bank is part of the holding company TCS Group, which is registered in Cyprus.

Key rating assessment factors

The Bank’s adequate business profile reflects its strong franchise in the area of unsecured consumer lending in the Russian Federation, which is confirmed by its strong position in the credit card market. In addition, the Bank continues to develop its transaction business, which contributes to the diversification of its operating balance. The Bank’s business profile takes into account the unique character of its business model in terms of the Russian banking market, as the Bank does not have its own operating network and performs all operations via its proprietary online platform in cooperation with a wide range of Russian partner banks.

ACRA assesses Tinkoff’s corporate governance as high in terms of the Russian banking sector. This can be attributed to the specifics of the Bank’s business model, which makes it possible to quickly implement the best corporate governance practices and to effectively manage business processes at all levels. At the same time, this sub-factor is limited by the concentration of shareholder risk on one key owner. In February 2020, the US Department of Justice filed tax claims against Oleg Tinkov. ACRA notes that despite the reputational risks associated with this event, it did not have a significant impact on the Bank’s day-to-day operations. ACRA also notes that Oleg Tinkov stepped down as Chairman of the Bank’s Board of Directors in April 2020. Despite this, ACRA will continue to carefully monitor the development of the situation with Oleg Tinkov and take into account the impact of new events on the Bank’s credit quality.

Capital adequacy is assessed as high. N1.2 regulatory CAR equaled 11.05% as of March 1, 2020. This allows the Bank to withstand an increase in credit risk of more than 500 bps. In June 2019, TCS Group conducted a secondary public offering in order to maintain the growth of the portfolio and meet the Central Bank’s requirements on unsecured lending. Tinkoff’s capital adequacy is traditionally backed by sound profitability indicators: for 2015–2019, the averaged capital generation ratio (calculated taking into account dividends and other payments to shareholders) exceeds 300 bps and is covered by the Bank’s record profits made in 2019.

The Bank’s profitability is based on its traditionally high net interest margin (NIM). NIM has averaged 21% over the past three years due to the high yield of unsecured loans and the low cost of the resource base. However, due to deteriorating economic conditions, ACRA forecasts increased pressure on earnings due to the expected increase in credit losses and lower growth in interest and commission income in 2020-2021.

The Bank’s satisfactory risk profile assessment is based on the adequate quality of risk management and a satisfactory base case risk profile assessment. At the end of 2019, loans classified as Stage 3 under IFRS accounted for 11% of the loan portfolio. ACRA also notes that the rapid growth of the portfolio (average annual growth of more than 40% over the past three years) may increase the impact of the economic downturn on the quality of the Bank’s portfolio compared to other Russian banks. However, ACRA notes that in the spring of this year, the Bank began to apply a more conservative approach to issuing loans. ACRA notes the growing number of refusals for unsecured loans. This is due to the Bank’s reduced risk appetite and the effect of new measures passed in October 2019 by the Central Bank aimed at curbing the growth of consumer lending. The improved diversification of the Bank’s business as well as reduced dependence on the unsecured lending market has had a positive affect on the Bank’s risk profile.

The Bank’s adequate liquidity and funding position is based on its stable short-term liquidity surplus and its independence from regulatory funding. The Bank’s short-term liquidity position reflects its surplus even in the event of fund outflow from current and deposit accounts under the stress scenario. This is ensured by Tinkoff’s substantial unencumbered portfolio comprised of high-quality and liquid bonds. ACRA notes the granularity of the Bank’s funding structure with the share of current retail accounts amounting to 46% of liabilities at the end of 2019. The size of most of these deposits does not exceed the insurance amount guaranteed by the Deposit Insurance Agency, and this ensures the stability of this resource base. There are no liquidity imbalances on the long-term horizon.

Key assumptions

  • Maintaining the current business model within the 12 to 18-month horizon;
  • Tier-1 capital adequacy above 8% within the 12 to 18-month horizon.

Potential outlook or rating change factors

The Stable outlook assumes that the rating will most likely stay unchanged within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Sustainable growth of the loan portfolio and a consistently low amount of overdue loans, taking into account the cyclicality of the consumer lending market.

A negative rating action may be prompted by:

  • Significant deterioration of loan portfolio quality with subsequent pressure on the Bank’s income and capital;
  • Significant alteration of the Bank’s business structure, which could cause additional credit and operating risks;
  • Deterioration in capital and liquidity positions.

Rating components

SCA: a.

Adjustments: none.

Issue ratings

Certified non-convertible exchange-traded interest-bearing unregistered bond issued by Tinkoff Bank, 001P-01R series (ISIN RU000A0JXQ85), maturity date: April 22, 2022, issue volume: RUB 5 bln — A(RU).

Certified non-convertible exchange-traded interest-bearing unregistered bond issued by Tinkoff Bank, 001P-02R series (ISIN RU000A1008B1), maturity date: March 21, 2029, issue volume: RUB 10 bln — A(RU).

Certified non-convertible exchange-traded interest-bearing unregistered bond issued by Tinkoff Bank, 001P-03R series (ISIN RU000A100V79), maturity date: September 12, 2029, issue volume: RUB 10 bln — A(RU).

Rationale. The issues represent senior unsecured debt of Tinkoff Bank. Due to the absence of either structural or contractual subordination of the issues, ACRA regards them as equal to other existing and future unsecured and unsubordinated debt obligations of the Bank in terms of priority. According to ACRA’s methodology, the credit ratings of the issues are equivalent to that of Tinkoff Bank, i.e. A(RU).

Tinkoff Bank Subordinated Perpetual Eurobonds (ISIN XS1631338495), issue volume: USD 300 mln — BB+(RU). Tinkoff Bank acts as a guarantor for any liabilities of TCS Finance D.A.C. in the issue.

Rationale. TCS Finance D.A.C., an Irish designated activity company, issued the USD 300 mln perpetual bonds and transferred all issue proceeds to Tinkoff Bank in the form of a subordinated loan. The issue implies a significant subordination to priority unsecured creditors and the right of Tinkoff Bank to cancel, at its discretion, coupon payments with the creditors having no right to claim unpaid interest. The issue terms and conditions provide for a full write-off of the loan in the event the Common Equity Tier 1 Ratio goes down below 5.125% or if the Deposit Insurance Agency institutes a bankruptcy prevention procedure. In accordance with the relevant ACRA methodology, the final credit rating for the issue of this type is set five notches below the Tinkoff Bank’s standalone creditworthiness assessment (a).

Regulatory disclosure

The credit ratings of Tinkoff Bank, bonds (RU000A0JXQ85, RU000A1008B1, RU000A100V79) issued by Tinkoff Bank and subordinated perpetual Eurobonds (XS1631338495) issued by Tinkoff Bank were assigned under the national scale for the Russian Federation based on the Methodology for Credit Ratings Assignment to Banks and Bank Groups Under the National Scale for the Russian Federation and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities. The Methodology for Assigning Credit Ratings to Individual Issues of Financial Instruments Under the National Scale of the Russian Federation was also used in the credit rating process.

The credit ratings of Tinkoff Bank, bonds (RU000A0JXQ85, RU000A1008B1, RU000A100V79) issued by Tinkoff Bank, and subordinated perpetual Eurobonds (ISIN XS1631338495) issued by Tinkoff Bank were first published by ACRA on May 19, 2017, May 25, 2017, April 3, 2019, September 25, 2019, and June 23, 2017, respectively. The credit rating of Tinkoff Bank and its outlook as well as the credit ratings of the above bonds are expected to be revised within one year following the publication date of this press release.

The credit ratings were assigned based on the data provided by Tinkoff Bank, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using IFRS consolidated statements of TCS Group Holding PLC (the main part of its assets pertains to Tinkoff Bank) and statements of Tinkoff Bank composed in compliance with the Bank of Russia Ordinance № 4927-U, dated October 8, 2018. The credit ratings are solicited, and Tinkoff Bank participated in their assignment.

No material discrepancies between the provided data and the data officially disclosed by Tinkoff Bank in its financial statements have been discovered.

ACRA provided no additional services to Tinkoff Bank. No conflicts of interest were discovered in the course of credit rating process.

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