ACRA affirms BBB(RU) to Credit Europe Bank (Russia) Ltd., outlook Positive, and BBB(RU) to bond issues

The credit rating of Credit Europe Bank (Russia) Ltd. (hereinafter, the Bank) is based on an adequate business profile assessment, adequate capital adequacy, a satisfactory risk profile, and adequate funding and liquidity. The credit rating outlook reflects ACRA’s expectations for an improved risk profile assessment as a result of slower loan portfolio growth.

The Bank is a universal medium-sized retail bank that ranked 53rd in capital as of March 1, 2020. The Bank is a part of FIBA Group, Turkey (hereinafter, the Group). Thirty five percent of shares in the Bank belong to FINA Holdings A.S., 55% belong to FIBA Holdings A.S, and the remaining 10% to Credit Europe Bank N.V. The Bank focuses on credit card business, car loans, unsecured consumer loans, and corporate banking.

Key rating assessment factors

Adequate business profile assessment. The Bank is an active player in the consumer lending market and has a strong franchise in the credit card and instant loan segments (among the top 10 banks). Since 2018, the Bank has extended its portfolio of retail loans, whose share has reached 74% of all loan receivables. A wide range of loan products and a significant volume of credit card fees ensure highly diversified operating income (the Herfindahl-Hirschman index was 0.17 in 2019). The quality of the Bank’s management and strategy is assessed as adequate in the context of the Russian banking system.

ACRA maintains an adequate capital assessment, given the Bank’s capital adequacy ratios and ability to generate net profit. ACRA notes an improvement in the Tier-1 capital ratio to 17.26% at the end of 2019 from 15.22% at the end of 2018. The improvement resulted from a decrease in the volume of risk-weighted assets due to a reduction in the loan portfolio. The current loss absorption reserve allows the Bank to withstand an increase in the cost of credit risk of 400-500 bps while complying with regulatory requirements. The capacity to generate capital from retained earnings has remained moderate: the averaged capital generation ratio for 2015-2019 was 68 bps.

ACRA assesses the Bank’s risk profile as satisfactory. ACRA notes a 13% reduction in the Bank’s total loan portfolio in 2019 due to a decrease in the volume of corporate loans. However, ACRA also notes the low growth (+2%) of retail lending in 2019. At the beginning of 2020, there was a further slowdown in the growth rate of issuance volumes. Problem loans (Stage 3 loans under IFRS) accounted for 9.3% of the total portfolio in 2019, up from 6.7% in 2018. The growth was due to both an increase in the gross volume of these loans and a decrease in the total volume of the Bank’s portfolio. ACRA notes a declining share of loans issued to construction and development companies, which amounted to less than 40% of the Bank’s fixed capital at the end of 2019, significantly lower than in 2018.

Adequate liquidity and funding profile. ACRA notes that the Bank’s liquidity position has remain strong. As of December 31, 2019, the Bank was able to withstand an outflow of client funds in both ACRA’s base case and stress scenarios. The long-term liquidity profile is assessed as strong, as the long-term liquidity shortage indicator exceeded 100% as of December 31, 2019. The funding profile is dominated by consumer funds, which formed 69% of liabilities as of December 31, 2019, and a low concentration on the largest creditors (the share of the top 10 groups of creditors reached 9.3%, while the share of the largest creditor was 2.6% as of the same date).

Key assumptions

  • FIBA Group retaining its shareholder and operating control over the Bank;
  • Cost of credit risk within 2%;
  • Net interest margin at 8%;
  • N1.2 above 9% within the 12 to 18-month horizon;
  • Maintaining the current funding profile.

Potential outlook or rating change factors

The Positive outlook assumes that the rating will most likely change within the 12 to 18-month horizon.

A positive rating action may be prompted by:

  • Lower share of problem loans in the portfolio;
  • Improved capital position;
  • Substantial increase in market share in key business segments.

A negative rating action may be prompted by:

  • Decline in capital reserves;
  • Substantial growth in problem loans;
  • Deteriorating liquidity position;
  • Growing concentration on a single funding source or on the largest creditors.

Rating components

SCA: bbb.

Adjustments: no.

Issue ratings

Credit Europe Bank (Russia) Ltd., (ISIN RU000A0ZZXP8), maturity date: December 9, 2020, issue volume: RUB 3 bln — BBB(RU).

Credit Europe Bank (Russia) Ltd., (ISIN RU000A100X77), maturity date: October 7, 2022, issue volume: RUB 5 bln — BBB(RU).

Credit rating rationale. The above issues represent senior unsecured debt instruments of Credit Europe Bank (Russia) Ltd. Due to the absence of either structural or contractual subordination of the issues, ACRA ranks them pari passu with other existing and future unsecured and unsubordinated debt obligations of the Bank. According to ACRA’s methodology, the credit rating of the issue is equivalent to that of Credit Europe Bank (Russia) Ltd., i.e. BBB(RU).

Regulatory disclosure

The credit ratings were assigned to Credit Europe Bank (Russia) Ltd. and the bonds issued by Credit Europe Bank (Russia) Ltd. (RU000A0ZZXP8, RU000A100X77) 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 Credit Europe Bank (Russia) Ltd. and the bonds issued by Credit Europe Bank (Russia) Ltd. (RU000A0ZZXP8, RU000A100X77) were first published by ACRA on July 14, 2017, December 12, 2018, and October 14, 2019, respectively. The credit rating of Credit Europe Bank (Russia) Ltd. 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 rating is based on the data provided by Credit Europe Bank (Russia) Ltd., information from publicly available sources, and ACRA’s own databases. The rating analysis is based on the consolidated IFRS financial statements of Credit Europe Bank (Russia) Ltd. and financial statements of Credit Europe Bank (Russia) Ltd. composed in compliance with the Bank of Russia Ordinance No. 4927-U, dated October 8, 2018. The credit ratings are solicited, and Credit Europe Bank (Russia) Ltd. participated in the rating process.

No material discrepancies between the data provided and the data officially disclosed by Credit Europe Bank (Russia) Ltd. in its financial statements have been discovered.

ACRA provided additional services to Credit Europe Bank (Russia) Ltd. No conflicts of interest were discovered in the course of credit rating assignment.

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