Flash Report /

Home Credit & Finance Bank: Planning to offer USD-subordinated Tier 1 Eurobond

    Boris Krasnozhenov
    Boris Krasnozhenov

    Head of Research (Managing Director)

    22 October 2019
    Published by
    • Home Credit & Finance Bank LLC, a leading consumer finance bank in Russia, rated BB- Stable (Fitch), and a subsidiary of international consumer finance holding Home Credit N.V. has mandated Alfa-Bank, BCS Global Markets, J.P. Morgan, Renaissance Capital, UBS Investment Bank and VTB Capital as Joint Lead Managers and Bookrunners to arrange a series of fixed income investor meetings in Moscow, Zurich and London on 24-29 October. 
    • A US dollar-denominated Reg S Basel III based Perpetual non-call 5.25yr additional Tier 1 issue by Eurasia Capital S.A. will follow, subject to market conditions. 
    • A 7-year Tier 2 subordinated Eurobond ($200 mn issue size) was called by the bank in April 2019. 
    • No price talk is available yet, but we believe the fair YTC is between 8.55% and 9.25%.

    Investment case

    Key corporate highlights. Home Credit & Finance Bank (HCF) is ranked #34 bank in Russia by asset base (according to Banki.ru). The bank has operated in Russia since 2002, focusing on unsecured consumer loans. HCF is part of Home Credit Group BV – a Netherlands-based banking group, operating in countries across CEE and Asia (Russia is the Group’s 2nd largest market after China). The main beneficiary is PPF Group (controlled by Peter Kellner), a global diversified investment holding.

    Business model: POS market leadership provides cross-selling opportunities. According to Frank RG estimates, HCF holds the #1 position on the point-of-sales (POS) loans market with c.21% market share. The bank’s partnerships with c.42k merchants (incl. leading Russian retailers) secures its competitive advantage in the niche. At the same time, measures by the Russian Central Bank (CBR) to tighten unsecured lending regulations are forcing competitors out of the segment (recently SocGen’s Rusfinance Bank announced plans to exit the segment). Cash loans are the largest contributor to HCF’s loan book (63% in 1H19) while the share of POS loans is 28%.

    Adequate portfolio quality, despite focus on unsecured lending. After the 2014-15 Russian financial crisis, HCF substantially improved its loan book quality. The share of impaired (Stage 3) loans was reduced to 4% as of 1H19 (vs. 16% in 2014). The cost of risk was reduced to 1.8% in 2018 and to 0.5% in 1H19 from 13-16% in 2014-15, with problem loans coverage (90 days +) of 119%. However, investors should be aware that under a stress scenario, CoR might return to the double-digits observed in 2014-15.

    Policy rate cuts reduce funding costs, supporting margins. With the focus on unsecured consumer lending, HCF generated a 12.9% NIM in 1H19. The NIM has proven stable over the past several years (averaging 12.4% in 2014-18). HCF’s blended loan book yield does not appear sensitive to policy rate moves and have been stable at 21-23% over the past five years. At the same time, recent CBR rate cuts have had a positive effect on funding costs: in 1H19, HCF’s customer deposit costs came in at 6.3%, the lowest level in five years (compared to a 9.04% average during 2014-18).

    Solid ROE, ample liquidity and capital. The bank generates capital organically: 24% ROAE in 2018 and 27% in 1H19. The N1.1 (and N1.2) ratio stood at 11% as of 1 September 2019, significantly exceeding (by 2.5-4pp) the minimum regulatory requirements. Liquidity (c.16% of total assets), which is represented by cash and investment-grade bonds, covered c.89% of customers’ on-demand accounts as of 1H19.