Sovcombank, a major private Russian bank, is holding a road show of perpetual subordinated dollar-denominated Eurobonds. The deal is scheduled for Thursday, 30 Jan 2020. The bonds have a call-option no earlier than 5.25 years after the offering. Indicative yield has not been disclosed yet. Fitch is expected to assign a B rating to the issue.

Estimated pricing:  In evaluating of fair yield of the upcoming Sovcombank T1 issue, we considered other outstanding subordinated fixed-term and perpetual bonds of Russian financial institutions. The last initial offer of perpetual Eurobonds was by HCF Bank (-/-/BB-)  placed in late 2019. HCFB perp (B-) is currently trading above par with YTC 8.2%. Sovcombank's perpetual notes should fairly offer a discount to HCFB, given Sovcombank's more conservative business model, larger scope of business and higher credit rating of the planned issue ('B' exp). The lower end of the yield range is seen at Sovcombank 30 subordinated Eurobonds (YTC 6.3%). The gap in the cost of raising Tier 1 and Tier 2 capital stands on average at least at 100-120 bps, according to our estimates.

Thus, our estimate of Sovcombank's yield range is 7.5-8% per annum. We believe below 7.5% is not attractive and has limited upside potential.  During the actual placement we recommend to put pricing orders closer to the upper end of the mentioned yield range.

Company overview. Privately-owned Sovcombank (Ba2/BB/BB+) is 11th-largest Russian bank in terms of asset size. Bank’s top-managers are also it’s major shareholders: Dmitry and Sergei Khotimsky (23 and 8% of equity, respectively) and Dmitry Gusev (6%). Credit and security portfolios represent key asset allocations of Sovcombank (43% and 35% of total assets). The loan portfolio is almost equally split between retail and corporate customers. The assets quality looks quite high - the non-performing loan (NPL) ratio stood at  2.2% as of 9M19. The bulk of securities is allocated in instruments rated double-B or higher.

Term deposits of individuals (38% of liabilities)  and corporates (20%) serve as the main source of bank’s funding.  The volume of issued securities (senior bonds and bills) is insignificant and does not exceed 2% of total liabilities.  The bank's equity stood at ₽133 bln as of 9M19. Sovcombank’s core capital is composed primarily of retained earnings. The capital adequacy ratio (Basel III) was as high as 13.6% (the minimum requirement is 4.5%). Bank of Russia’s capital adequacy ratio N 1.0 was 12% (the minimum requirement is 8%) as of 2019.

Key financials

Key financial

Source: Bank’s data, ITI Capital

Russian financial institutions bond map

Russian financial institutions bond map

Source: Bloomberg, ITI Capital

Olga Nikolaeva