The affirmation of the credit rating of “Sovcombank Leasing”, LLC (hereinafter, Sovcombank Leasing or the Company) reflects ACRA’s expectations that over the next 12–18 months, the degree of support from the parent bank (hereinafter, the Supporting Entity, SE, or the Group) will remain very high, which, together with strong business profitability, will continue to somehow mitigate the risks arising against the backdrop of a still unstable operating environment and the Company’s commitment to a rapid, in the Agency’s opinion, growth strategy.
Sovcombank Leasing’s standalone creditworthiness assessment (SCA) has been upgraded by one notch to bbb+ based on the improvement of one of the components of the business profile assessment: low concentrations on individual lessees, which continue to decline, contribute to greater business stability. The SCA increase is also supported by the Company’s proven ability to achieve consistently high financial results, even during periods of heightened uncertainty, coupled with regular support from the SE, which contributes to the significant competitive advantage. The latter, among other things, is expressed in the comparatively stable funding base, which, in ACRA’s opinion, adds to the Company’s more effective adaption to external challenges.
The SCA of Sovcombank Leasing is based on adequate business and risk profiles, strong capital adequacy, and a satisfactory funding and liquidity position.
ACRA has removed the “Rating under review — developing” status that was assigned to the credit rating and set a Stable outlook, mirroring a similar rating action made with regard to the SE’s credit rating.
key assessment FACTORS
Very high level of support from the Group. ACRA believes that in case of an emergency, the SE is willing and able to promptly provide the Company with both short-term and long-term financing, as well as inject capital. ACRA’s expectations are backed up by the history of interaction between the SE and the Company, as well as examples of regular support from the SE. In particular, the Agency took the following into account:
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Full strategic control exercised by the SE and strong legal and operational ties between the SE and the Company;
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Developing the Company’s activities is part of the Group’s strategy concerning auto lending and leasing, and the Company regularly receives financing from the SE (64% of liabilities as of the start of 2023), as well as capital injections to support regular operations (RUB 0.6 bln in 2021 and RUB 1 bln in 2022);
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As the Company operates under a similar brand, insolvency of Sovcombank Leasing would, in ACRA’s opinion, be associated with the SE, which would in turn be subject to serious reputational damage;
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The fact that some of the SE’s securities indicate conditions for their early repayment, default or bankruptcy of the SE in the event of a default by the Company.
Adequate business profile assessment. Sovcombank Leasing occupies relatively stable positions in the group of medium-sized leasing companies that focus on financial leasing of vehicles, mainly in the cargo segment. Business stability is evidenced by consistently high profitability, which retains its values even in times of crisis. From 2016 to 2022, the average return on equity and assets in accordance with the Company’s IFRS financial statements was about 35% and 8%, respectively. Last year, these indicators remained close to the averages, despite industry-wide difficulties associated with the availability of machinery, cars and other imported leasing items. The relatively low concentration of the lease portfolio on individual clients also contributes to the sustainability of performance indicators.
According to ACRA, the presence of the SE remains a serious competitive advantage for Sovcombank Leasing, especially at times of occasional decline of creditor and investor confidence in the leasing industry. In addition, regular support from the SE, as well as the possibility of obtaining emergency assistance if necessary, will continue to somewhat mitigate the potential negative consequences of the relatively rapid, in the Agency’s opinion, growth of the Company’s business.
Capital adequacy is assessed as strong, despite significant growth of the lease portfolio thanks to high profitability and regular external support in the form of capital. The value of the averaged capital generation ratio (ACGR) for the past five years was 390 bps, while the capital adequacy ratio (CAR) for the end of 2022 was 17%. ACRA expects the CAR to remain at the current relatively comfortable level of no lower than 13–15% over the next 12 to 18 months. The refusal to pay dividends over the next 12 to 18 months will continue to support Sovcombank Leasing’s ability to independently ensure that capital is sufficient for business growth (dividends accounted for a fairly significant part of the Company’s annual revenues prior to 2020).
Adequate risk profile. According to ACRA’s estimates, the share of potential problem and non-performing lease assets, which, in addition to the current potentially problem lessees, also includes the amounts of terminated lease contracts and the book value of seized/returned lease assets, amounted to around 3–5% of the Company’s total lease assets as of beginning of 2023.
The Agency notes that this share will continue to be somewhat diluted by the Company’s plans to grow the lease portfolio. In particular, as the portfolio seasons over the next 12 to 18 months amid a continuing challenging operating and competitive environment and a relatively low level of coverage of problem assets by impairment reserves, unforeseen credit losses may occur. The potential negative impact of the materialization of credit risks is somewhat mitigated by the presence of highly liquid collateral and effective recovery procedures.
Satisfactory funding and liquidity position. Bank loans continue to crowd out bond funding and have already become the main source of finance, accounting for about 64% of liabilities at the beginning of the year. As market conditions are not conducive to public offerings, this trend is likely to continue over the next 12-18 months. The lion’s share of bank financing is funds from the SE, which is loyal to the Company.
The Company’s liquidity management policy reflects the specifics of its business, which, due to the high liquidity of leased equipment and firm ties with the SE, does not involve maintaining a significant cushion of highly liquid assets on the balance sheet. As a result, the current liquidity ratio under the Agency’s base case forecast for the next 12 months slightly exceeds 1.0x. This approach is based on the possibility of a rapid decline in lease sales and quick receipt of additional liquidity from the SE if needed, which, when combined will significantly mitigate the moderate liquidity deficit in the event of a stress scenario (assuming a decrease in cash flows from lessees by 20%).
KEY ASSUMPTIONS
- Maintaining the current business model and ability to receive extraordinary support from the SE over the 12 to 18-month horizon.
POTENTIAL OUTLOOK OR RATING CHANGE FACTORS
The Stable outlook assumes that the rating will highly likely stay unchanged within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- Higher creditworthiness of the SE and/or signs of a closer relationship with it.
A negative rating action may be prompted by:
- Lower propensity of the SE to support the Company or lower creditworthiness of the SE.
RATING COMPONENTS
SCA: bbb+.
Adjustments: none.
Support: credit rating of the SE minus one notch.
issue ratings
No outstanding issues have been rated.
regulatory disclosure
The credit rating of “Sovcombank Leasing”, LLC has been assigned under the national scale for the Russian Federation based on the Methodology for Assigning Credit Ratings to Leasing Companies under the National Scale for the Russian Federation, Methodology for Analyzing Rated Entities Associated with a State or a Group, and the Key Concepts Used by the Analytical Credit Rating Agency Within the Scope of Its Rating Activities.
The credit rating of “Sovcombank Leasing”, LLC was published by ACRA for the first time on December 27, 2017. 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 data provided by “Sovcombank Leasing”, LLC, information from publicly available sources, and ACRA’s own databases. The rating analysis was performed using the IFRS consolidated financial statements of “Sovcombank Leasing”, LLC and the RAS financial statements of “Sovcombank Leasing”, LLC. The credit rating is solicited and “Sovcombank Leasing”, LLC participated in its assignment.
In assigning the credit rating, ACRA used only information, the quality and reliability of which were, in ACRA’s opinion, appropriate and sufficient to apply the methodologies.
ACRA provided no additional services to “Sovcombank Leasing”, LLC. No conflicts of interest were discovered in the course of credit rating assignment.
