Fitch Rating Rationale on Downgrade of Bank Diamant
January 28, 2009 "Fitch Ratings"
Fitch Ratings- London/Moscow-27 January 2009: Fitch Ratings comments today on the recent downgrade of Ukraine-based Bank Diamant’s National Long-term rating to 'B+(ukr)’ from 'BB-(BB minus)(ukr)’. The Outlook is Negative. The rating action was taken as part of a more general review of Ukrainian bank ratings, and took into account the heightened liquidity and asset quality risks and greater pressure on capital which Ukrainian banks have faced following the sharp depreciation of the UAH in Q408, as well as the weaker outlook for the Ukrainian economy.
The downgrade reflects the weakening of the bank’s liquidity position following significant recent deposit outflow, as well as the potential for significant asset quality deterioration in light of the bank’s large credit exposure to the construction sector, significant related-party lending and the deterioration in the operating environment. High borrower concentrations and low free capital are also negatives for the rating. At the same time, the rating also considers the current low level of reported non-performing loans.
Like many other Ukrainian banks, Bank Diamant experienced a marked deposit outflow in Q408 (a reduction of 14% net of the impact of UAH depreciation, according to Fitch estimates), notwithstanding a deposit from the shareholder made in December, and saw a further 10% drop in the first half of January 2009. The liquidity cushion (cash and equivalents plus the net interbank position) has become limited and covered the deposit base by just 4% as at 15 January 2009.
Reported NPLs have remained low, with loans overdue by 90 days or more reportedly comprising 0.2% of the portfolio at end-2008. However, Fitch notes the sizeable exposure to the construction sector, which may be vulnerable during the current macroeconomic downturn. In addition, the impairment reserve (equal to 3.3% of gross loans at end-2008) may prove insufficient in case of large individual defaults in a highly concentrated loan portfolio. Capital adequacy was moderate (total regulatory capital ratio of 14.8% at end-2008), and free capital comprised only 30% of equity.
A further downgrade would be possible in case of further deterioration in the bank’s liquidity position, significant credit losses or erosion of the capital base. A stabilisation of the macroeconomic environment, cessation of the deposit outflow and strengthening of the liquidity position could lessen pressure for a downgrade.
Bank Diamant was established in 1993 and specialises mainly in corporate lending and private banking services. The bank was ranked 62nd in Ukraine by total assets, with a market share of 0.2%, at end-Q308. Bank Diamant has a network of 59 branches and outlets covering 14 regions of Ukraine. It is solely owned by David Zhvania, a member of the Ukrainian parliament (the Verkhovnaya Rada).
Company — Diamantbank
Full nameCommercial Bank "Diamantbank"