Renaissance Financial Holdings #B-/B# Ratings Outlook Stable

Stocks and Financial Services Press Releases Tuesday October 24, 2017 17:48
MOSCOW--24 Oct--S&P Global Ratings

MOSCOW (S&P Global Ratings) Oct. 24, 2017--S&P Global Ratings today affirmed its 'B-/B' long- and short-term issuer credit ratings on Bermuda-registered broker Renaissance Financial Holdings Ltd. (RFHL). The outlook remains stable.

The affirmation reflects our view that RFHL's credit profile has not changed materially over the past 12 months and it will likely remain stable over the 18-month rating horizon. We recognize that RFHL has made progress in eliminating exposure to noncore assets and reducing loans and receivables due from its shareholder and other related parties. In the first half of 2017, following its earlier approved strategy, RFHL fully divested its 49% stake in Ukrainian Agrarian Investments S.A., a company managing agrarian lands in Western and Central Ukraine. In 2014, these investments brought about large revaluation losses of $123.2 million. We incorporated risks associated with these investments in our risk-adjusted capital (RAC) ratio of RFHL; selling the asset helped to strengthen RFHL's capital adequacy. We note that the divestment was neutral for RFHL's profit and loss.

As at June 30, 2017, loans and receivables to related parties, including RFHL's shareholder, stood at $1,258 million (about 2.6x of total equity), which represents a decline of about $220 million since the end of 2015. The shareholder has indicated its willingness to further reduce its debt to RFHL, and we expect that exposure to related parties will decline by a further $450 million-$500 million by the end of 2018. Despite the expected reduction, we anticipate that loans and receivables to related parties will remain significant over the next 12-18 months, and will still represent more than 1.5x of the broker's capital as of year-end 2018.

We expect that RFHL's RAC ratio, adjusted for the negative earnings buffer, will remain 7.45%-8.0% for the next 12-18 months. We take into account RFHL's moderate organic business growth over the next two years and expect that at least part of the proceeds received from related parties' redemptions will be replaced by receivables to other counterparties and securities investments. RFHL's earnings capacity and its ability to cover possible losses by earnings remain modest. We view RFHL's capital and earnings as moderate, but because we consider that the large expected exposure to related parties will continue to present risks for RFHL's credit profile, we have not changed our joint assessment of the broker's capital and risk position. Although we acknowledge that the broker has maintained solid risk management and a modest risk appetite, we think that still-high balance-sheet concentrations stemming from receivables to related parties weaken RFHL's risk position.

We view RFHL's funding as moderate. The broker mainly relies on short-term collateralized funding and payables, which represented about 90% of its total liabilities as of year-end 2016. In our view, RFHL doesn't have sufficient long-term funding sources to fund its exposure to related parties and its proprietary position, which may become illiquid in case of market stress. This asset-liability mismatch is reflected in RFHL's gross stable funding ratio, which stood at 35.9% as of June 30, 2017, and which remains lower than that of peers. This mismatch also creates a large short-term liquidity gap. Nevertheless, we continue incorporating in our adequate-high liquidity assessment of RFHL the ongoing liquidity support from 100% shareholder Onexim, which, in our view will be provided to RFHL if needed. Although we expect that further redemptions of loans by shareholders will improve RFHL's funding and liquidity ratios, we think that asset-liability mismatches will not be fully eliminated over our rating horizon.

We assess RFHL's business position as adequate, owing to RFHL's solid customer franchise, diversified business, and geographical mix, as well as its experienced management team and supportive shareholder. That said, RFHL's core business has shown high revenue volatility for the past five years because of the confidence-sensitive nature of business volumes in its key markets. In 2016, RFHL's operating revenues declined by 30.6%, reflecting low interest from RFHL's key clients in the Russian market. Although RFHL's operating revenues recovered, increasing by 17.4% in the first half of 2017, we expect RFHL's earnings capacity will remain subdued, due to its relatively high cost-to-income ratio. Overall, we anticipate that management may take time to adjust the business model to deliver more stable and predictable earnings through the cycle.

The stable outlook on RFHL reflects our expectations that it will maintain sufficient capital buffers and moderate risk appetite, while risks from related parties' loans will gradually decline.
We consider a positive rating action to be remote over our rating horizon. However, we could upgrade RFHL if it eliminates its exposure to related parties while sustainably improving its earnings capacity.

We could lower the ratings on RFHL in the next 12-18 months if we saw that RFHL was dependent upon favorable business, financial, and economic conditions to meet its financial commitments. For example, we could downgrade RFHL if its liquidity position deteriorated or if we reconsidered the likelihood of ongoing support from Onexim.


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