Fitch Rating Rationale on Affirmation of Bank Khreschatyk’s Ratings
January 30, 2009 "Fitch Ratings"
Fitch Ratings-Frankfurt/Moscow/London-29 January 2009: Fitch Ratings comments today on the recent affirmation of the ratings of Ukraine's Bank Khreschatyk (the Outlook on the bank’s Long-term Issuer Default Rating (IDR) remains Negative). The rating affirmation was part of a more general review of Ukrainian bank ratings, which took into account the heightened liquidity and asset quality risks and greater pressure on capital which Ukrainian banks have faced as a result of the sharp depreciation of the UAH in Q408, as well as the weaker outlook for the Ukrainian economy. A full list of Khreschatyk’s ratings, which the agency affirmed on 26 January 2009, is provided at the end of this commentary.
The affirmation of Bank Khreschatyk’s ratings reflects its still solid capital ratios, the relatively low - by Ukrainian market standards – proportion of foreign currency lending, low reported loan impairment to date and the relative stability of the bank’s niche franchise with entities related to the City of Kiev. At the same time, the bank’s asset quality is likely to deteriorate as the loan book seasons in a very tough environment, which explains the Negative Outlook.
Customer funding has been more stable than at most peers in Q408, although coverage of customer accounts by liquid assets is also somewhat lower. Fitch estimates that customer deposits (net of accounts of the City of Kiev) fell by about 5%, net of FX effects, in Q408. At end-2008, liquid assets (defined as cash; net short-term interbank placements; placements with the National Bank of Ukraine net of obligatory reserves; and unpledged government securities) covered customer funding by about 12%. Wholesale funding maturing in 2009 is moderate relative to the size of the balance sheet.
Impaired loans (defined as loans overdue by more than 90 days) increased only marginally during H208 and remained low at about 1% of the loan portfolio at end-2008. Although the significant slowdown in domestic growth, coupled with further seasoning of the portfolio, could result in a more significant asset quality deterioration at Khreschatyk, Fitch notes that the bank's total capital ratio is more comfortable than at many of its peers, meaning it has somewhat more capacity to absorb additional losses. At end-2008, Khreschatyk’s total regulatory capital ratio was 17.7%.
In 2008, following very rapid growth in 2007, the loan portfolio was relatively stagnant, reflecting funding constraints. The volume of the loan portfolio even decreased slightly in UAH terms during Q408, indicating an approximately 11% contraction of the book net of FX effects and supporting the capital position. FX lending (predominantly USD) equalled about 25% of total loans at end-2008, which gives rise to significant additional credit risk, but to a noticeably less degree than at most peers.
Renewed deposit outflow or a marked deterioration in asset quality could result in a downgrade of Khreschatyk’s ratings. Stabilisation of the macroeconomic environment and maintenance of the current liquidity, asset quality and capital positions could reduce downward pressure on the ratings.
A 58% stake in Bank Khreschatyk is indirectly controlled by the Kyiv Investment Group, which also holds stakes in a large number of Ukrainian companies operating in various industries. Although the City of Kiev’s stake fell below a majority share in 2006, the City still holds a 24% stake, and the bank remains an important financial partner for the City due to its strong presence in the Kiev region and because of its existing business ties with the City administration and local companies. Khreschatyk was founded in 1993 and had UAH5.2bn of assets at end-2008.
Bank Khreschatyk’s ratings are as follows:
Long-term foreign currency IDR: affirmed at 'B-' (B minus); Outlook remains Negative
Senior unsecured debt: affirmed at 'B-' (B minus); Recovery Rating affirmed at 'RR4'
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'B-' (B minus); Outlook remains Negative
Individual Rating: affirmed at 'D/E'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term rating: affirmed at 'BBB-(ukr)' (BBB minus); Outlook remains Negative
Company — Khreschatyk Bank
Full namePublic joint-stock company Commercial Bank "Khreschatyk"