Moody's affirms TCS Bank B2 ratings, outlook stable
MOSCOW. Oct 30 (Interfax) - Moody's Investors Service has affirmed ratings assigned to Tinkoff.Credit Systems (TCS Bank).
The agency said in a press release that it had affirmed the B2 long-term local- and foreign-currency debt and deposit ratings; the Not Prime short-term local- and foreign-currency deposit ratings; the B3 foreign-currency subordinate rating and the standalone bank financial strength rating (BFSR) of E+, equivalent to a baseline credit assessment (BCA) of b2. The outlook on all of the bank's long-term ratings remains stable.
The affirmation of Tinkoff.Credit Systems' ratings follows the credit card lender's recent IPO and captures the risks associated with the bank's rapid expansion in the Russian consumer finance segment.
Moody's assessment of the issuer's ratings is largely based on Tinkoff.Credit Systems' audited financial statements for 2012, its unaudited financial statements for H1 2013, prepared under IFRS as well as information received from the bank.
Tinkoff.Credit Systems is a monoline credit card lender that has increased its loan book by 53% (annualised) in H1 2013, and the bank expects its rapid growth to continue in 2014. Moody's believes that such rapid growth amid the deteriorating operating environment for this sector poses high risk of asset quality erosion. The bank's credit costs (loan loss provisions as a percentage of average gross loans) increased to 14.5% in H1 2013 (2012:10.6%) as the bank was rapidly growing in an environment of increasing borrower's indebtedness. Moody's expects annualised loan growth for this sector to exceed 20% in the next 12 to 18 months, which is considerably above the population's nominal income growth; therefore, Tinkoff.Credit Systems will continue its rapid expansion amid the increasing indebtedness and growing defaults in the sector.
Downward pressure has been exerted on Tinkoff.Credit Systems' ratings as a result of the risks associated with increasing asset quality erosion; however, the bank's attraction of new capital reinforces its ability to absorb losses in the next 12 to 18 months and provides some alleviation of the above-mentioned risks. Tinkoff.Credit Systems has attracted $175 million (before transaction costs) of new capital during the IPO held in October 2013. Moody's believes that the new capital should materially reinforce the bank's capital position (the bank's equity as at end-June 2013 -- totalled $356 million). As of H1 2013, the bank reported strong Tier 1 and total capital adequacy ratios of 15.0% and 22.0%, respectively, under Basel III, and the rating agency believes that these ratios should further improve following the IPO.
At the same time, Moody's expects the trend of rapid loan growth will dilute these capital ratios in the next 12 to 18 months as Tinkoff.Credit Systems' profitability -- albeit remaining robust -- is normalising at lower levels. In H1 2013, the bank reported a still robust (but declining) return on average assets of 6.9% (year-end 2012: 8.3%; year-end 2011: 10.8%), and return on equity of 48.5% (year-end 2012: 59.5%; year-end 2011: 87.2%). Moody's expects the bank's profitability to normalise at a level lower than the bank's targeted loan growth, because of the growing credit risks in the sector and the increasing competition; therefore, the rating agency expects the currently high capital ratios to revert to lower levels.
Moody's also notes Tinkoff.Credit Systems' high share of wholesale funding and internet deposits that render the bank vulnerable to potential periods of liquidity squeeze. Although the bank has successfully diversified and lengthened its funding base over the past two years, thereby enhancing the sustainability of its resource base, the share of wholesale funding remains high at around 50% of total non-equity funding at H1 2013. Another major source of funding -- internet deposits -- has not yet been tested by liquidity shocks; therefore its potential volatility remains highly unpredictable.
The upgrade potential of Tinkoff.Credit Systems' ratings is limited in the next 12 to 18 months given the bank's rapid growth strategy amid the deteriorating operating environment. The bank's ratings might be adversely affected if the bank's strategy of rapid growth leads to deterioration of its financial fundamentals.
