Training on Forecasting September 17–18

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

The credit rating of Credit Europe Bank Ltd. (hereinafter, the Bank) has been affirmed in view of the adequate assessments of its business profile, capital adequacy, liquidity and funding, and the satisfactory risk profile assessment. The credit rating outlook reflects ACRA's expectations for better risk profile assessment following a decline in the volume and share of problem loans.

The Bank is a universal medium-sized retail bank that ranked 49th in terms of capital and 48th in terms of assets as of June 01, 2019. The Bank is a part of FIBA Group, Turkey (the Group). 55% shares in the Bank belong to FIBA Holdings A.S., 35% to FINA Holdings A.S. and 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 business profile assessment has been affirmed at "adequate" to reflect the Bank's sustainable positions in the Russian banking market. The Bank is an active player in the consumer lending market, and it benefits on the strong franchise in the car loans and instant loans segments (among the top 10 banks) and the credit card segment (among the top 15 banks). In 2018–2019, the Bank has been extending its portfolio of retail loans, whose share topped 63% of all loan receivables. A wide range of loan products and a significant volume of credit card fees ensure high diversification of operating income (the Herfindahl-Hirschman index was 0.15 in 2018). The quality of management and strategy is assessed as adequate in the context of the Russian banking system.

ACRA has kept the adequate assessment of the Bank’s capital position, taking into account the capital adequacy ratios and the ability of the Bank to generate net profit. The Agency notes that in 2018, the Tier-1 capital adequacy ratio decreased from 18.42% to 14.68% amid the rapid growth in the retail loan portfolio. On the other hand, the regulatory capital adequacy ratio N1.2 has remained almost unchanged over the last 12 months: 10.64% as of July 01, 2019 against 10.95% as of July 1, 2018. The current loss absorption reserve allows the Bank to withstand the growth in the cost of credit risk in the range of 300–400 bps and comply with regulatory requirements. The capacity to generate capital from retained earnings has remained moderate: the averaged capital generation ratio (under IFRS) amounted to 47 bps for 2014–2018. The decline in the net interest margin seen in the period from 2014 to 2015 was caused by the thinning consumer loan portfolio on the back of the increased cost of risk, which affected the Bank's profitability.

Satisfactory risk profile assessment is a result of lower concentration of loans on high-risk industries, on the one hand, and the rapid growth of the unsecured loan portfolio, on the other. As of March 31, 2019, the volume of loans granted to construction and development companies was is less than 100% of the common capital. At the same time, the risk profile assessment is limited by the rapid growth of the portfolio of retail loans (by over 60% in the period from June 01, 2018 through June 01, 2019), including unsecured loans. In our opinion, the rapid growth of unsecured lending pulls up the Bank’s exposure to regulatory risks and may put additional pressure on the Bank's capital following the introduction of new CBR requirements that increase risk ratios for such loans. Moreover, in our opinion, the growing volume of unsecured retail loans may push up the risks for the Bank's portfolio quality in the current conditions.

The rapidly growing aggregate portfolio has pushed down the share of problem loans: the share of problem and potentially problem loans (in ACRA's terms) has declined from 13.2% to 10.6% of the portfolio over the last 12 months preceding March 31, 2019, including the 5.4% share of NPL90+ and the 2% share of restructured loans granted to individuals. The share of loans denominated in foreign currencies (about 22% of the total portfolio and 60% of the corporate portfolio) is still high.

Adequate liquidity and funding profile. ACRA notes that the Bank's liquidity profile has remain strong. As of March 31, 2019, the Bank was able to withstand the outflow of client funds in both base case and stress scenarios of ACRA. The long-term liquidity profile is assessed as strong, as the long-term liquidity shortage indicator (LTLSI) was higher than 100% as of March 31, 2019. The funding profile is dominated by individuals' funds, which form 64.8% of liabilities less subordinated debt as of March 31, 2019 and a low concentration on the largest creditors (as of March 31, 2019, the share of top 10 groups of creditors was 12.2%, and the share of the largest creditor was 2.8%).

Key assumptions

  • FIBA Group will retain its shareholding and operating control over the Bank;
  • The cost of credit risk will not exceed 2%;
  • The net interest margin will remain at 8%;
  • Tier 1 capital adequacy ratio (N1.2) will be above 9% at the 12 to 18-months horizon;
  • The current funding profile will remain unchanged.

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 non-performing loans in the portfolio;
  • More stable volume and consistent quality of the portfolio of loans granted to individuals, primarily, unsecured loans;
  • A substantial increase in the market share held by the Bank in the key business segments.

A negative rating action may be prompted by:

  • A decline in capital reserves;
  • A substantial growth in problem loans;
  • A deteriorating liquidity position;
  • A growing concentration on a single funding source or on the largest creditors.

Rating components

SCA: bbb.

Adjustments: no.

Issue ratings

Credit Europe Bank Ltd., (ISIN RU000A0ZZXP8), maturity date: December 09, 2020, issue volume: RUB 3 bln — BBB(RU).

Credit Europe Bank Ltd., (ISIN RU000A0ZYDA5), maturity date: October 17, 2019, issue volume: RUB 5 bln — BBB(RU).

Credit rating rationale. The above issues represent senior unsecured debt instruments of Credit Europe Bank 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 the ACRA methodology, the credit rating of the issue is equivalent to that of Credit Europe Bank, i.e. BBB(RU).

Regulatory disclosure

The credit ratings were assigned to Credit Europe Bank Ltd. and the bond (ISIN RU000A0ZYDA5, RU000A0ZZXP8) issued by Credit Europe Bank Ltd. 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 Ltd. and the bonds (ISIN RU000A0ZYDA5, RU000A0ZZXP8) issued by Credit Europe Bank Ltd. were first published by ACRA on July 14, 2017, October 24, 2017, and December 12, 2018, respectively. The credit rating of Credit Europe Bank 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 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 Ltd. and financial statements of Credit Europe Bank Ltd. composed in compliance with the Bank of Russia Ordinance No. 4927-U dated October 08, 2018. The credit ratings are solicited, and Credit Europe Bank Ltd. participated in the rating process.

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

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

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