Russia-Based State Transport Leasing Co. PJSC Ratings Raised To 'BB' On Increased Public Role; Outlook Stable

  • We believe that the public role of State Transport Leasing Co. PJSC (STLC) in the modernization and development of Russia's transport sector has gradually strengthened over the past two years, with STLC securing an increasing share of the transport leasing market and greater involvement in state programs.
  • As a result, we have revised the likelihood of STLC receiving extraordinary government support to high from moderately high.
  • We are raising our long-term issuer credit rating on STLC to 'BB' from 'BB-' to include an additional notch above STLC's stand-alone credit profile for government support. We are also affirming our short-term issuer credit rating on STLC at 'B'.
  • The stable outlook on STLC reflects our view that in the next 12 months, the solid pipeline of government programs involving STLC as a policy tool will continue to support the company's market share and its growing leasing portfolio, thereby sustaining its significant public policy role for the Russian government.
MOSCOW (S&P Global Ratings) June 21, 2019--S&P Global Ratings today raised its long-term issuer credit rating on Russia-based State Transport Leasing Co. PJSC (STLC) to 'BB' from 'BB-'. At the same time, we affirmed our 'B' short-term issuer credit rating on STLC. The outlook is stable.
The upgrade stems from our view that STLC's public role in the modernization and development of Russia's transport sector has gradually strengthened over the past two years, with STLC securing an increasing share of the transport leasing market and greater involvement in state programs. We consider STLC to be a government-related entity and have revised the likelihood of extraordinary government support upward to high from moderately high. This reflects STLC's important role for the Russian government due to its involvement in policy, and STLC's very strong link with the Russian government due to the government's full ownership and strong oversight of STLC's business and strategy. As a result, our long-term rating on STLC is now three notches higher than its stand-alone credit profile (SACP), compared to two notches previously.
We understand that the government does not have plans to privatize STLC and therefore we expect STLC to continue implementing the government's agenda to support the transport industry. Moreover, STLC's strategy is under the supervision and coordination of the government, including the Ministry of Transport and the Ministry of Industry and Trade of the Russian Federation. Other state-related leasing companies remain under sanctions and might not have the capacity or willingness to contribute, making STLC even more important as a leasing tool for the government, in our view.
Although the leasing market remains very competitive, with a large number of private- and public-sector players, STLC plays a unique role in the government's import-substitution policy in the transport sector, including aviation projects. STLC is also involved in implementing government programs for noncommercial leasing in certain key segments, such as energy efficiency leasing, maritime leasing and the development of transport infrastructure. These segments are important for the transport industry's long-term development, but are not attractive to private leasing companies because of their long-term, capital-consuming nature and low margins. STLC's leasing portfolio has increased several fold since 2014; the company now ranks first in Russia by the size of its leasing portfolio, as well as by its generation of new leasing business. We therefore believe that STLC will continue to be irreplaceable in the government's transport policy.
Our view of STLC's SACP has not changed. We continue to note high single-name concentration. In 2018, the 20 largest lessees represented about 70% of the gross leasing portfolio (89% in 2017), and exposure to the largest client accounts about 14% of the leasing portfolio. We view positively STLC's intention to diversify the portfolio by business line, but we believe that it will take time to reduce each line and will be difficult to achieve given the company's involvement in state projects.
STLC's asset quality compares favorably with that of peers, with assets classified in stage 3 under IFRS 9 comprising 0.47% of the gross leasing portfolio at year-end 2018, with 96% covered by provisions. The low percentage is, however, to a large extent supported by very fast asset growth over the past several years. We consider the quality of STLC's portfolio to be vulnerable to swings in operating conditions, particularly due to single-name concentration in riskier operating leasing activities. We note, however, that those risks are partly mitigated by STLC's growing expertise in managing both problem exposures--by taking over the underlying assets--and residual value risk.
Over 2018, STLC's risk-weighted asset growth outpaced that of its capital base, and we expect this trend to continue in 2019-2020. As a result, we observe that STLC's projected capital buffers measured by our risk-adjusted capital (RAC) ratio fell to 5.3%-5.7% in 2019-2020 from 7.7% in 2018. However, this decline remains neutral for the ratings. We include in our forecast additional capital of Russian ruble (RUB) 13.8 billion that is stated in the government budget and that STLC expects to receive in 2020. At the same time, we consider that STLC could potentially receive additional capital in the course of the current budgeting process for 2020-2022.
The Russian government has increased STLC's capital substantially to support the execution of various transport development programs. In total, the government has provided STLC with about RUB89 billion in the past 10 years, including RUB20.7 billion in 2018.
We understand that STLC will continue increasing its business volumes and its involvement in state programs, driving substantial lease portfolio growth that could exceed 17% in 2019 and be above the market average. Government injections have been a key source of fresh capital for STLC, as its ability to generate capital internally remains weak. We understand that profitability is not the company's or its shareholder's key priority, given its public role and its involvement in noncommercial leasing. Therefore, we do not expect any meaningful improvement in STLC's earnings capacity in 2019-2020.
In our view, STLC's stable funding position supports its business performance and it can manage its liquidity requirements on an ongoing basis and in periods of stress. We consider STLC's funding profile to be in line with the system average for nonbank financial institutions in Russia, for which we take ongoing support from state-owned banks into account. In our view, STLC's liquidity is adequate, since the company generates enough cash to cover interest payments and other costs. Our cash flow analysis shows that STLC's liquidity buffer exceeds its monthly requirements by 1.3x on average over the coming two years.
The stable outlook on STLC reflects our view that in the next 12 months, the solid pipeline of government programs that involve STLC as a policy tool will continue to support the company's market share and its growing leasing portfolio, thereby sustaining its significant public policy role for the Russian government.
We could take a negative rating action within the next 12 months if:
  • The growth of risk-weighted assets outpaced that of the capital base, resulting in insufficient capital buffers and a projected RAC ratio below 5%.
  • We observed a weakening of STLC's risk management systems, for example, via a pronounced deterioration of asset quality, due to one large borrower defaulting without a proper action plan from the government, or to an elevation of residual value risk.
  • We considered that the likelihood of support from the government had diminished, for example, due to the company's reduced public policy role.
We see the possibility of a positive rating action as remote in the coming 12 months.
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