Fitch Rating Rationale on Affirmation of Bank Credit Dnepr

Fitch Ratings- London/Moscow-29 January 2009: Fitch Ratings comments today on the recent affirmation of Ukraine-based Bank Credit Dnepr’s (BCD) ratings; the Outlook on the bank’s Long-term IDR remains Negative. The rating actions were 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. A full list of rating actions on BCD is provided at the end of this release. BCD has, like other Ukrainian banks, experienced a notable deposit outflow in Q408 and, in Fitch view, is likely to face asset quality deterioration in light of its recent strong credit growth, the high proportion of foreign currency lending and the tougher operating environment. Furthermore, the current pressure on the credit profile of major Ukrainian pipes and railway wheels producer, Interpipe Limited (‘B-’ (B minus)/Rating Watch Negative), which has the same major shareholder as BCD, could become a source of contagion risk for the bank. However, in Fitch’s view, these risks are currently reflected in the bank’s ‘B-’ (B minus) rating and the Negative Outlook. BCD’s ratings are supported by its reasonable current capitalisation, moderate reported loan impairment to date and the regional focus of the bank’s franchise. In common with most Ukrainian banks, BCD experienced a marked reduction in customer accounts in October-November 2008 (a decrease of 15% net of the impact of UAH depreciation, according to Fitch estimates). However, this has since been partly reversed, with the deposit base rising 8% (net of FX effects) between mid-December 2008 and mid-January 2009. Nevertheless, BCD’s liquidity position remains vulnerable: the liquidity cushion (cash and equivalents, due from National Bank of Ukraine and net short-term interbank placements) covered customer accounts by only 17% at 19 January 2009, a relatively modest level given the previous degree of deposit instability. Wholesale refinancing needs will also crystallise in April 2009, when a put option on UAH100m domestic bonds becomes due, although their amount is relatively modest compared to BCD’s balance sheet. The reported proportion of loans overdue by more than 30 days was moderate, at 3.7% at end-2008; however, Fitch notes that additional impairment is likely to crystallise as the loan book seasons in a tough operating environment. The proportion of foreign currency loans was a high 42% at end-2008. The regulatory total capital adequacy ratio was reasonable and higher than most peers at 15% at end-2008 (and unaudited Basel I total capital adequacy ratio stood at around 25%). However, any substantial credit losses would directly erode the equity base as the impairment reserve (equal to 3.5% of gross loans at end-2008) may prove insufficient in case of large individual defaults in a concentrated loan portfolio. A downgrade of BCD’s ratings would be possible in case of significant credit losses or renewed sharp deposit outflow, or should the bank be negatively impacted by any further deterioration in the financial profile of Interpipe Limited. A stabilisation of the macroeconomic environment, and maintenance of moderate loan impairment ratios and an acceptable liquidity position could reduce downward pressure on the ratings. BCD is based in Dnepropetrovsk, south-eastern Ukraine. The bank is Ukraine’s 42nd-largest bank, holding less than 0.5% of sector assets at end-Q308, with a network counting three branches and 52 outlets. Victor Pinchuk, a prominent Ukrainian businessman, and his family members are the beneficiaries of both BCD and Interpipe Limited. Rating actions: Long-term IDR: affirmed at 'B-' (B minus); Outlook Negative; Short-term IDR: affirmed at 'B' 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 (ukr)); Outlook Negative

• Full name
  PJSC Bank "Kredit-Dnepr"
• Industry
  Banks