The outlook on the credit rating of Credit Europe Bank Ltd. (hereinafter, the Bank) has been changed from Stable to Positive based on ACRA's expectations that the risk profile of the Bank will improve. The Bank is still characterized by adequate business profile, substantial capital cushion, and adequate liquidity and funding.
The Bank is a universal retail medium-sized bank that ranked 54th in terms of capital and 60th in terms of assets as of June 01. 2018. 99.99% shares in the Bank are held by Credit Europe Bank N.V. (the Netherlands), a part of FIBA Group (Turkey). By the end of July 2018, 90% shares in the Bank are expected to be transferred to certain companies within FIBA Group (45% to FIBA Holding and 35% to FINA Holding). The Bank focuses on credit card business, car loans, unsecured consumer loans, and corporate banking (incl. project finance).
Key rating assessment factors
Adequate business profile assessment. The Bank is an active player in the consumer lending market, and it has a strong franchise in the credit cards and instant loans segments (among the Top 10 banks). For 2018, the Bank has plans to extend its presence in the car loans market. A wide range of loan products and a significant volume of credit card fees ensure a high diversification of operating income (the Herfindahl-Hirschman index was 0.18 in 1Q2018). The management and strategy quality is assessed as adequate in the context of the Russian banking system.
Improving risk profile. The level of problem and potentially problem loans (in ACRA's terms) has declined from 20% to 13.2% of the portfolio over the last 12 months preceding March 31, 2018, including the 7.7% share of NPL90+ and the 3.8% share of restructured loans granted to individuals). The concentration on high-risk industries is still increased: loans issued to real estate and construction companies accounted for about 100% of Tier-1 capital at the end of March 2018, and we expect that the indicator will decline in the next 12–18 months. ACRA also notes a high share of loans denominated in foreign currencies (about 35% of the total portfolio and 70% of the corporate portfolio).
Comfortable capital cushion combined with moderate capital generation capacity. The Bank maintains a sound Tier 1 capital adequacy: the average N1.2 ratio was 11.5% in 12 months preceding June 01, 2018. This allows the Bank to withstand a significant (more than 400 bps) increase in the credit risk costs and comply with the regulatory standards. The capital generating capacity based on retained earnings is estimated as moderate as the IFRS average capital generation ratio was 69 bps in 2013-2017. The business profitability was affected by the net interest margin decrease in 2014-2015 (due to a reduction in the portfolio of consumer loans), combined with the increased cost of risk.
Adequate liquidity and balanced funding profile. ACRA notes that the Bank's liquidity profile has improved over the past 12 months: as of March 31, 2018, the Bank can withstand the outflow of client funds in both the 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 equal to 100% as of March 31, 2018. The funding profile is dominated by individuals' funds, which form 62% of liabilities as of March 31, 2018 (53% a year earlier), and a low concentration on the largest creditors (as of March 31, 2018, the share of top 10 groups of creditors was 12.8%, and the share of the largest creditor was 4.1%).
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 7%;
- 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 be upgraded within the 12 to 18-month horizon.
A positive rating action may be prompted by:
- A substantial decrease of non-performing loans in the portfolio or the concentration on high-risk industries;
- A substantial increase in the market share of key business segments.
A negative rating action may be prompted by:
- A substantial decline in capital reserves;
- A substantial growth in problem loans or concentration on high-risk industries;
- A deteriorating liquidity position;
- A growing concentration on a single funding source or on the largest creditors.
Rating components
CA: bbb.
Adjustments: no.
Issue ratings
Credit Europe Bank Ltd., (ISIN RU000A0ZYDA), maturity date: October 17, 2019, issue volume: RUB 5 bln, — BBB(RU).
Credit rating rationale. The issue represents senior unsecured debt of Credit Europe Bank Ltd. Due to the absence of either structural or contractual subordination of the issue, ACRA ranks it 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 RU000A0ZYDA) 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 bond (ISIN RU000A0ZYDA) issued by Credit Europe Bank Ltd. were first published by ACRA on July 14, 2017 and October 24, 2017, respectively. The credit rating of Credit Europe Bank Ltd. and its outlook as well as the credit rating of the above bond are expected to be revised within one year following the rating action date (July 12, 2018).
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. 4212-U dated November 24, 2016. The credit rating is solicited, and Credit Europe Bank Ltd. participated in its assignment.
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
