January 31, 2014 |
|Standard & Poor's Ratings Services today said it lowered its long-term counterparty credit ratings on three Ukraine-based banks--PrivatBank, Alfa-Bank Ukraine, and PJSC KREDOBANK--to 'CCC+' from 'B-'. The outlooks on the three banks are negative. We also affirmed our 'C' short-term counterparty credit ratings on these banks. At the same time, we lowered the Ukraine national scale ratings on Kredobank and Alfa-Bank Ukraine to 'uaBB-' from 'uaBBB-'. |
Our downgrades of the three banks follow a similar action on Ukraine (see "Foreign Currency Ratings On Ukraine Lowered To 'CCC+/C' On Political Turmoil; Outlook Negative," published Jan. 28, 2014, on RatingsDirect).
We view the sovereign's creditworthiness as the major risk factor for Ukrainian banks because of their high operational, funding, and asset exposure to the domestic economy. The escalation of the political turmoil in Ukraine makes the expected financial support package from Russia less certain, in our opinion, if the government of President Yanukovych falls. We believe Ukraine is currently vulnerable to, and dependent on, favorable political and economic developments to service its debt obligations.
This political instability, coupled with very weak economic prospects, increases risks for the banking sector, which is by nature confidence-sensitive. Still, under our base case scenario, we expect that the Ukrainian hryvnia (UAH) will gradually stabilize against the dollar at a rate of about UAH8.5:US$1. A sharper devaluation would likely hurt the banks' already fragile asset quality and capital. We understand that the political turmoil so far hasn't had a pronounced impact on the banks' funding and liquidity positions. However, we don't rule out deposit withdrawals from or runs on the banks, disruptions to the banks' payment systems, and liquidity shortages, if protestors' clashes with the government escalate and continue.
Alfa-Bank Ukraine and Kredobank are subsidiaries of large foreign groups, whose creditworthiness is substantially superior to that of Ukraine. We think these foreign parents would provide extraordinary support to their affiliates in Ukraine. Kredobank is a subsidiary of Poland-based Powszechna Kasa Oszczednosci Bank Polski S.A. and Alfa-Bank Ukraine is ultimately owned by Russian financial-industrial group Alfa Group Consortium, whose main banking arm is Alfa-Bank OJSC. We believe this foreign ownership provides benefits to both banks, notably in risk management and the sustainability of their commercial franchises. We regard the two banks as "moderately strategic" subsidiaries for their respective parents. We believe the foreign parents would inject liquidity into their Alfa-Bank Ukraine and Kredobank if needed. However, we do not include notches of uplift in the ratings on the two banks from their 'ccc+' stand-alone credit profiles (SACPs) to reflect parental support.
We view PrivatBank as having higher stand-alone creditworthiness than Alfa-Bank Ukraine and Kredobank. Our 'b+' assessment of PrivatBank's SACP reflects its stronger franchise, competitiveness, and risk position than the other two banks.
Still, the long-term ratings on PrivatBank, Alfa-Bank Ukraine, and Kredobank are constrained by the foreign currency long-term sovereign rating on Ukraine. In our view, these three banks do not meet the criteria under which we would rate them higher than Ukraine, given that they are predominantly exposed to their domestic market (see "Ratings Above The Sovereign—Corporate And Government Ratings: Methodology And Assumptions," published on Nov. 19, 2013). Although we acknowledge that the banks have low exposure to Ukraine sovereign debt and state-related enterprises, we believe the banks would likely be hit hard by a sovereign default, if one were to occur, and the ensuing toll on the economy. In our hypothetical default scenario, the National Bank of Ukraine might be unable to provide local currency liquidity to the banking sector, and borrowers' creditworthiness would deteriorate due to the hryvnia's devaluation. We also foresee potential deposit outflows and closed access to capital markets.
The negative outlooks on PrivatBank, Alfa-Bank Ukraine, and Kredobank primarily reflect our outlook on the sovereign. We consider that sovereign-related risks will continue to be the largest risks for these banks' financial profiles, especially their capital and liquidity, if Ukraine's political landscape remains unstable and economic prospects deteriorate further. Any lowering of the foreign currency long-term rating on Ukraine would trigger a similar lowering of the long-term ratings on these three banks.
We could consider revising the outlooks to stable if we saw signs that political tensions were abating and Ukraine was securing external funding for its high gross external financing requirement. We would also seek signs that PrivatBank, Alfa-Bank Ukraine, and Kredobank are able to stabilize their financial and business profiles--especially their liquidity, capitalization, and asset quality--despite the prolonged uncertainty and weak economic environment in Ukraine.
|Full company name||PJSC "Kredobank"|
|Country of risk||Ukraine|
|Country of registration||Ukraine|