AKIPRESS.COM - Fitch Ratings has revised the outlook of Russia-based Home Credit and Finance Bank (HCR) and its Kazakh subsidiary, SB JSC Home Credit and Finance Bank (HCK), to Negative from Stable.

Their Long-term Issuer Default Ratings (IDRs) have been affirmed at 'BB' and 'BB-', respectively.

The revision of the Outlook on HCR's Long-term IDRs reflects the weakening operating environment in Russia and its potential further negative impact on the bank's performance. The Outlook also considers the already challenging operating conditions for the Russian consumer finance sector in general and HCR in particular, as portfolio seasoning and higher household leverage have caused credit losses to widen significantly.

At the same time, the ratings remain supported by HCR's considerable resilience against potential shocks, given its high margins, solid capital buffer and strong liquidity. HCR's credit losses - defined as non-performing loans (NPLs, 90 days overdue) originated in the period divided by average performing loans - increased to 17% in 2013 from 14% in 1H13 and 10% in 2012. Positively, vintage analysis suggests the quality of 2H13 loan generations improved moderately, as HCR tightened its underwriting standards and focused on lower-risk clients.

However, the sustainability of this trend is yet to be tested, and risks remain on the downside given expected sluggish performance of the Russian economy this year. HCR may also find it challenging to compete for better-quality borrowers with larger corporate banks which target the same clientele, but may offer lower rates and larger loan tickets. Profitability remained sound in 2013 (return on average equity (ROAE) of 21%, down from 51% in 2012), but in Fitch's view is likely to come under greater pressure in 2014, and may be close to breakeven.

This is due to (i) a reduction in insurance-related fees, which are booked upfront at loan origination and comprised 33% of pre-impairment profit in 2013, but are likely to decrease significantly in 2014 as Fitch expects close to zero loan growth judging by 1Q14 loan growth in statutory accounts; (ii) a moderate contraction of margins due to the growing share of lower-risk, lower-yield lending in HCR's portfolio and a gradual increase in funding costs in line with recent market trends; and (iii) a likely further increase in loan impairment charges, at least in 1H14, as weaker vintages issued in 2H12-1H13 continue to season.

Management expects performance to improve by end-2014 after a weaker 1H14, although in Fitch's view that could be challenging given the tougher environment and the ongoing rebalancing of the business model. HCR's capitalisation is solid with a Fitch Core Capital (FCC) of 15.5% at end-2013 and on-balance sheet NPLs (12% of gross loans at end-2013) fully reserved. Regulatory capital is tighter (total capital ratio of 14.8% at end-1Q14) because of increased risk-weightings on higher-yielding loans issued after July 2013. However, the bank has some flexibility to manage this by altering product structures and possibly also selling or originating on to the balance sheets of related entities higher-margin businesses.

Funding and liquidity remain a rating strength for HCR. Despite the moderate 12% outflow of customer funding in 1Q14, Fitch views HCR's deposit collection capacity as strong due to competitive rates and a wide branch network. HCR's deposit base (74% of end-2013 liabilities) is granular and is adequately covered by liquid assets (16% at end-1Q14). Liquidity risk is further mitigated by quick turnover of loans, with monthly proceeds from loan repayments of about RB25bn, equal to 8% of liabilities. Following the repayment of a USD500m eurobond in March 2014, HCR's remaining refinancing needs for 2014 are a low RUB8bn (3% of total liabilities).