Fixed Income. Credit Bank of Moscow - Plans to Place New Dollar AT1 Perps

Credit Bank of Moscow (CBM) today opened the order book for a new dollar-denominated AT1 perpetual bond offering. The bond will be in Reg S/144A formats, and the bank is looking to place a benchmark-sized volume. We think the bank's concentrated balance sheet structure continues to weigh on its debt valuations versus those of its closest local peers with tradable hard-currency AT1 perps, though on the positive side its financial metrics have remained robust over the past two years. Based on current valuations, we expect the deal to be priced at 7.0-7.5%. The new dollar deal announcement came only a week after the bank successfully closed a $500 mln, 5y senior transaction (see our September 15 Debt Markets Today). Such a quick return to the market is quite rare, but the management appears to be looking to capitalize on the relatively benign market conditions and fix a lower borrowing rate. The issuance of junior debt should not come as a major surprise to investors, as the bank is approaching the first call options on its subordinated dollar bonds in October and November of next year, and the management recently explicitly said the bank was eyeing the opportunity for a subordinated debt placement.CBM was among the first Russian lenders to place AT1 hard-currency perpetual bonds, which it did in April 2017. Over the past nearly five years, the bonds have had their ups and downs in the secondary market, driven by domestic factors, the pandemic, and the ever-changing perception of geopolitical risks. CBM's balance sheet has also undergone a significant transformation during this period and is now dominated by low-margin reverse-repo deals, which account for 43.5% of total assets and expose the bank to higher concentration risks. We think these factors continue to weigh on CBM's bond valuations versus those of local peers.On a positive note, CBM has demonstrated resilience throughout 2020 and so far this year, with the pandemic having only a limited impact on asset quality. In July, S&P upgraded its senior debt rating by one notch to BB on the back of its robust asset quality and a successful SPO earlier in the year. However, the bank continues to lag local peers Sovcombank and Alfa Bank in terms of internal capital generation (ROAE ex-perps was 13.2% in 1H21). Given its higher business concentration, CBM is also lagging its peers in terms of fee generation (see our August 24 Debt Markets Today for our comment on the bank's 2Q21 earnings).