OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'B' long-term and 'C' short-term counterparty credit ratings and 'ruBBB+' Russia national scale rating on National Factoring Co. (NFC) The outlook is negative.

At the same time, we removed the 'B' long-term global scale and the 'ruBBB+' national scale ratings from CreditWatch with negative implications, where we had placed them on May 13, 2016.

In our view, during the last three months, several issues regarding NFC's further strategic development after changes in ownership have been clarified. We understand that NFC will continue to develop as a separate business of Vladimir Kogan, a wealthy Russian individual. We do not expect significant changes in NFC's strategic development in the next 12-18 months, nor do we think that financial and operational goals set up by the new owner will weigh on NFC's creditworthiness.

We do not expect that there will be significant changes in the relationship between NFC and BANK URALSIB (PJSC), which is also owned by Mr. Kogan. Historically, NFC has been highly dependent on funding from BANK URALSIB and we anticipate that this will continue to be the case. We also note BANK URALSIB's ability to provide support has improved after it received a large recapitalization package from the Russian central bank under the financial rehabilitation in 2015.

After a brief pause following the departure of its previous insurer from the Russian factoring market, NFC has restarted insuring its nonrecourse risks with a new Russia-based insurer. We consider the insurance of its large nonrecourse factoring portfolio to be a significant factor supporting NFC's strong risk position. Historically, nonrecourse factoring constituted the major part of NFC's factoring portfolio and we viewed nonrecourse factoring as having higher credit risks than factoring with recourse.

As we understand, the terms and conditions of the new agreement are similar to those of the previous insurer and it will not lead to higher insurance expenses than NFC incurred previously. We also believe that the creditworthiness of the new insurance counterparty will not weigh on the effectiveness of the insurance coverage.

At the same time, we still think that NFC may face high credit losses and its asset quality may deteriorate in the next 12-18 months due to the continuing unfavorable economic environment in Russia. At the end of the second quarter of 2016, impaired loans constituted around 15.0% of the gross factoring portfolio. Although, we see some stabilization in asset quality, we do not exclude further deterioration in the coming months. New credit losses may remain elevated, in our view, which may negatively affect NFC's risk position and capitalization as measured by our risk-adjusted capital ratio.

We note that NFC's funding profile remains highly concentrated, with a large dependence on funding from URALSIB BANK and other short-term interbank deposits. We view the funding profile as a risk for NFC's liquidity position, which is somewhat mitigated by the relatively short-term nature of its factoring portfolio, which can run-off cash quite quickly if required. We also note that NFC's funding and liquidity metrics are unfavorable compared with those of peers.

The negative outlook reflects our view that high economic and industry risks in Russia may lead to further deterioration of NFC's asset quality, while its concentrated and short-term funding profile may weigh on its liquidity position.

We could lower the ratings if we see significant deterioration in NFC's asset quality, resulting in credit costs substantially exceeding 2.0%-2.5% of the average factoring portfolio, or nonperforming assets exceeding 20% of its gross factoring portfolio. A negative rating action may also follow if we see deterioration of NFC's liquidity position, for example, as a result of the nonrenewal of its interbank credit lines.

We view a positive rating action as remote. We would consider revising the outlook on NFC to stable if NFC maintains its adequate capital buffers and stable asset quality, and reduces concentration of its funding profile. To take such an action, we would also need to see broad stabilization of operating conditions for the Russian banking sector, notably with evidence of improving asset quality and stabilizing credit losses.