Fitch Ratings assigned Russia-based Orient Express Bank (OEB) a Long-term Issuer Default Rating (IDR) of 'B+' with a Negative Outlook, the rating agency informed.
OEB's Long-term IDRs are based on its Viability Rating (VR) of 'b+' reflecting (i) OEB's weak asset quality, (ii) moderate capitalisation compared with retail peers and recently weak internal capital generating capacity.
The Negative Outlook reflects the recent significant deterioration in asset quality and limited evidence that this has stabilised, combined with the bank's limited capacity to absorb additional losses. At the same time, the ratings positively consider OEB's sound pre-impairment results, subdued risk appetite, as reflected in below market growth rates, balanced funding mix and currently comfortable liquidity.
OEB's credit losses were sharply up in 2013 as the non-performing loans (NPLs; 90 days overdue) origination rate (increase in NPLs plus write-offs during reported period) climbed to 15.4% of average performing loans in 9M13 from only 6.4% in 2012. This reflected the general deterioration of the consumer finance market and seasoning of the rapidly expanded loan book, coupled with slower portfolio growth (11% in 9M13 vs 66% in 2012).
The bank's pre-impairment profit, although solid at 93% of average equity, implied a breakeven NPL origination rate of only 14.3% of loans, slightly below actual credit losses. This suggests that the bank would have been loss-making in 9M13 had it fully reserved new NPLs.
OEB is predominantly deposit-funded (84% of end-3Q13 liabilities), with retail deposits equal to 71% of total liabilities. About half of this amount falls under the deposit insurance system, contributing to funding stability.
The bank is gradually shifting its funding structure to a larger proportion of wholesale current accounts in an effort to optimise funding costs, but retail deposits are likely to remain the main source of funds.
Refinancing risk is limited in the medium term due to the small proportion of wholesale debt in the funding mix, and as most of this matures after 2015.
Liquidity is adequate and underpinned by OEB's quickly amortising loan book. The cushion of highly liquid assets covered 16% of total customer funding at end-3Q13, while monthly loan repayments generated cash equivalent to a further 9% of customer accounts.
OEB's Fitch core capital (FCC) ratio declined to a moderate 12.4% at end-3Q13 from 14.1% at end-2012 due to OEB's weak internal capital generation. The bank's regulatory capitalisation is slightly pressured (albeit to a lesser extent than at peers) by higher regulatory risk weights on high-yield unsecured retail loans, but was supported by a subordinated debt placement in 4Q13, which brought the regulatory total capital adequacy ratio to 13.7% at end-2013.
However, Fitch views OEB's capitalisation as only moderate given the current pressure on asset quality.
The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support from the bank's shareholders or the Russian state cannot be relied upon, in the latter case due to OEB's low systemic importance.
The ratings could be downgraded if further deterioration of asset quality causes credit losses to consistently exceed OEB's breakeven loss rate. Conversely, a longer track record of asset quality stabilisation together with still solid pre-impairment profitability could help stabilise the ratings at their current levels.
OEB's senior unsecured debt is rated in line with its Long-term IDRs and National Rating (for domestic debt issues), reflecting Fitch's view of average recovery prospects, in case of default. Any changes to OEB's Long-term IDRs and National Ratings would likely impact the debt ratings. Debt ratings could also be downgraded in case of marked increase in the proportion of retail deposits in the bank's liabilities, resulting in greater subordination of bondholders. In accordance with Russian legislation, retail depositors rank above those of other senior unsecured creditors.
Orient Express Bank (Russian: Vostochny Express Bank, Blagoveshchensk city, tax number: 2801015394) was established in 1991 as a regional bank providing services to clients in the Far East and Eastern Siberia. The bank acquired Etalonbank, Bank Dvizheniye and Kamabank in 2009, Rostpromstroybank in 2010, City Morgage Bank in 2011. Orient Express Bank also acquired 100% of voting shares of Santander Consumer Bank.
The bank's shareholding structure comprises both physical persons (Sergey Vlasov, Igor Kim, Andrei Bekarev, Alexander Taranov), and major portfolio investors (International Finance Corporation).
Net profit of Orient Express Bank for 2013 net of events after the balance sheet date dropped 3 times to RUB 1.574 billion from RUB 4.825 billion the year before. Pre-tax profit decreased 2.1-fold to RUB 3.142 billion from RUB 6.748 billion