ACRA affirms A(RU) to Home Credit and Finance Bank, LLC, outlook Stable

ACRA has affirmed the credit rating of Home Credit and Finance Bank, LLC (hereinafter, the Bank) based on the Bank’s moderate business profile, strong capital adequacy position, adequate risk profile, and adequate liquidity and funding position. The volatility of asset quality and profit indicators due to the Bank’s business model, as well as the significant concentration of funding on consumer funds, limit the Bank’s standalone creditworthiness assessment (SCA). The rating is supported by the high probability of shareholder support.

The Bank is a subsidiary of the holding company Home Credit N.V., which owns and operates banks in China, countries in Southeast Asia, India, the Czech Republic, and Slovakia. Home Credit N.V. is part of the international group PPF, which manages assets in various sectors including financial services, telecommunications, engineering, biotechnology, etc. The Bank’s largest ultimate beneficiary is Petr Kellner. The Bank has a subsidiary bank, “Home Credit,” which is active in retail lending in Kazakhstan.

Key rating assessment factors

The Bank’s business profile assessment reflects its position in the Russian banking system; the Bank ranked 22nd in capital and 33rd in assets among Russian banks for 9M 2020. The Bank’s business is concentrated in the segments of non-targeted unsecured consumer lending (63% of the total portfolio as of July 1, 2020), targeted loans for the purchase of goods and services (25%), and credit cards (11%). Moreover, the Bank occupies leading positions in the Russian market of targeted loans for the purchase of goods and services.

However, the monolithic nature of the Bank’s business limits the business profile assessment. At the end of 2019, the Herfindahl-Hirschman Index, used by ACRA to assess the diversification of operating income, stood at 0.61. ACRA also takes into account the risks of the Bank’s strategic position regarding the high exposure of unsecured consumer lending to economic cycles.

ACRA assesses the Bank’s capital adequacy as strong. As of July 1, 2020, Tier 1 capital adequacy, calculated according to Basel standards, amounted to 29.2%. As of October 1, 2020, this indicator stood at 16.9% according to RAS (N1.2). ACRA’s stress test shows that the Bank’s capital currently demonstrates a comparatively high ability to absorb credit risks over the next 12 months.

High profitability indicators also support the Bank’s strong capital adequacy assessment. The average capital generation ratio, calculated according to ACRA’s criteria, exceeds 170 bps for the last 5 years. The Bank’s business model allows it to maintain a high NIM, which averaged 12.6% for 2017−2019. CTI for the same period was 49.7%.

The adequate risk profile assessment reflects the low level of the Bank’s problem debt and the specifics of its business model, which is based on high-risk unsecured lending.

According to the Bank’s IFRS financial statements for H1 2020, loans overdue by more than 90 days accounted for 4.2% of the total loan portfolio. According to ACRA, the Bank demonstrates a high resistance to shocks from quarantine measures. However, ACRA believes that the risks of a second wave of the pandemic may put some pressure on the quality of the Bank’s loan portfolio.

ACRA assesses the Bank’s liquidity and funding as adequate based on the Bank’s short-term liquidity surplus in both ACRA’s base case and stress scenarios. However, ACRA takes into account the specifics of the Bank’s business model, which is based on short-term funding from consumer deposits, and assumes potentially increased risks of significant outflows of funds. The significant concentration of funding on consumer funds (81% as of July 1, 2020) limits the Bank’s liquidity and funding assessment.

ACRA has made an upward adjustment to the Bank’s SCA based on the likelihood of shareholder support. The adjustment takes into account the accumulated history of support from the Bank’s key beneficiary and its companies. ACRA has added one notch to the Bank’s SCA according to the Methodology for Analyzing Member Company Relationships Within Corporate Groups.

Key assumptions

  • Maintaining the current business model and development strategy;
  • Maintaining problem and potentially problem loans below 10% of the loan portfolio;
  • Maintained shareholder and operational control by Home Credit N.V.;
  • N1.2 above 10% 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:

  • Significantly improved position in the Russian financial services market;
  • Improved diversification in funding sources.

A negative rating action may be prompted by:

  • Significant increase in problem loans in the loan portfolio;
  • Significant decrease in profitability and capital adequacy;
  • Reduced likelihood of support from the controlling shareholder.

Rating components

SCA: a-.

Adjustments: SCA +1 notch accounting for shareholder support.

Issue ratings

No outstanding issues have been rated.

Regulatory disclosure

The credit rating has been 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, Methodology for Analyzing Member Company Relationships Within Corporate Groups, and the Key Concepts Used by the Analytical Credit Rating Agency within the Scope of Its Rating Activities.

The credit rating of Home Credit and Finance Bank, LLC was published by ACRA for the first time on November 19, 2019. The credit rating and its outlook are expected to be revised within one year following the publication date of this press release.

The credit rating was assigned based on the data provided by Home Credit and Finance Bank, LLC, information from publicly available sources, as well as ACRA’s own databases. The rating analysis was performed using the consolidated IFRS financial statements of Home Credit and Finance Bank, LLC and the financial statements of Home Credit and Finance Bank, LLC drawn up in compliance with Bank of Russia Ordinance No. 4927-U, October 8, 2018. The credit rating is solicited, and Home Credit and Finance Bank, LLC participated in its assignment.

No material discrepancies between the provided information and the data officially disclosed by Home Credit and Finance Bank, LLC in their financial statements have been discovered.

ACRA provided no additional services to Home Credit and Finance Bank, LLC. No conflicts of interest were discovered in the course of credit rating assignment.

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