OREANDA-NEWS. Fitch Ratings has assigned Russia's Sovcombank (SCB) a Long-term Issuer Default Rating (IDR) of 'B+' with a Stable Outlook.

SCB's ratings reflect (i) its short track record in the Russian consumer finance market; (ii) the challenging outlook for Russian consumer finance banks given increasing borrower leverage and rising arrears; (iii) potentially significant volatility in the bank's performance and asset quality, which are largely untested through the negative side of the economic cycle; (iv) significant dependence of pre-impairment profitability on loan issuance volumes; and (v) fairly high exposure to market risk. However, the ratings also reflect SCB's currently adequate asset quality, sound liquidity and reasonable capitalisation, and its somewhat more conservative credit underwriting relative to peers.

SCB's non-performing loans (NPLs, 90 days overdue) origination rate (defined as net increase in NPLs plus write-offs) remained a moderate 11% (annualised) of average performing loans in 3M14, only slightly up from 10.7% in 2013. This compares well with peers, as sector average credit losses were a high 15.5% in 2013 and continued to creep up in the beginning of 2014.

SCB's results seem to have been only mildly affected by negative market trends so far, in part due to the bank's somewhat different client focus and significantly smaller loan tickets (around RUB60,000 on average, well below its peers). However, operating conditions for the Russian consumer finance sector in general, and SCB in particular, remain challenging, as expressed by sizeable uplift in credit losses in the sector in 2013, driven by the growing leverage of Russian retail borrowers. In Fitch's view, SCB's track record of reasonable asset quality and performance in a more challenging operating environment is limited.

Upside pressure on SCB's ratings could stem from (i) an extended track record of reasonable performance and asset quality through the cycle; and (ii) the gradual recovery of the operating environment. Significant deterioration of SCB's asset quality and/or liquidity position would put downward pressure on the bank's ratings.