Fitch Ratings has downgraded Russia-based Home Credit & Finance Bank’s (HCFB) Long-term Issuer Default Ratings (IDRs) to ‘B+’ from ‘BB-‘ and its Kazakhstan-based subsidiary SB JSC Home Credit and Finance Bank (HCK) to ‘B’ from ‘B+’. The Outlook is Negative for HCFB and Stable for HCK.The agency has also placed the ‘B’ Long-term IDRs of Russian Standard Bank (RSB) and Orient Express Bank (OEB) on Rating Watch Negative (RWN).The rating actions reflect the banks’ weakening credit profiles amid negative trends in the operating environment.The core consumer finance business of all three banks’ has been loss-making since at least mid-2014 due to further credit losses, resulting in gradual capital erosion. The magnitude of bottom-line losses increased in 1Q15, due to higher funding costs for the sector after the Central Bank of Russia (CBR) rate hike in December 2014, and may increase further due to asset quality risks stemming from rouble devaluation, increased inflation, a fall in people’s real incomes and rising unemployment.Sector loan growth prospects are sluggish due to capital constraints at most banks and limited inflows of less leveraged clients with an at least moderate credit risk profile. Fitch expects unsecured retail lending in Russia to fall 10% in 2015.The RWN on RSB’s and OEB’s ratings reflects the weak core regulatory capitalisation as reflected by their regulatory Tier 1 (N1.2) ratios of, respectively, 6.4% at end-2014 and 6.7% at end-1Q15, which were only marginally above the regulatory minimum of 6%. The RWN also reflects the currently loss-making performance, which if continues at this pace and not reversed and/or alleviated by capital injections, puts the banks at risk of breaching regulatory capital ratios by end-1H15, according to Fitch estimates.

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