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Fitch Affirms 4 Ukrainian Banks, Revises Outlook on Khreschatyk to Negative

July 19, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-18 July 2012: Fitch Ratings has affirmed the Long-term IDRs of four privately-owned Ukrainian banks: PJSC CB Privatbank (Privat) at 'B', and Pivdennyi Bank (PB), Industrialbank (INB) and Bank Khreschatyk at 'B-'. The Outlooks on Privat and PB remain Stable, and on INB is Negative. The Outlook on Khreschatyk has been revised to Negative from Stable. A full list of rating actions is at the end of this comment.
Privat's rating reflects its high levels of credit risk as a result of recent rapid growth in Ukraine's still challenging operating environment, high borrower and industry concentrations and potentially sizeable related-party business. The bank's recent loan growth was driven by exposures to the oil trading and metallurgy sectors, where Privat's owners have business interests. Exposure to the oil trading sector remains particularly high (29% of loans at end-Q112) having grown rapidly by 71% in 2010-2011. Fitch still has concerns about the adequacy of the financing received relative to the business volumes of these borrowers, as well as sources of loan repayments. Exposure to the top 20 borrowers accounted for 17% of loans or 130% of equity at end-Q112, although, in Fitch's view, concentrations could be higher given possible links between the borrowers in the oil trading sector. Reported related-party lending at 48% of end-Q112 equity potentially could be significantly higher, in Fitch's view.
Privat's non-performing loans (NPLs) stood at 4.5% of end-Q112 loans, after write offs of 3% of average loans in 2011 and 1% in Q112. In addition to NPLs, 19% of loans were individually determined to be impaired. Reserve coverage of NPLs and individually impaired loans was a moderate 54% at end-Q112, although recent loan growth could result in further provisioning requirements. Fitch calculates that the bank could currently create reserves equal to about 20% of the loan book before regulatory or Basel total capital ratios would fall to 10%, in addition to annual pre-impairment profit equal to 6% of average gross loans creates material loss absorption capacity. Privat's liquidity is currently comfortable, underpinned by continued deposit inflows. Near-term refinancing requirements are low, with a USD200m eurobond due to be repaid only in September 2015 (1% of end-Q112 liabilities).
Fitch has also affirmed the Long-term rating on Privat's senior unsecured debt at 'B' and the Recovery Rating on the debt at 'RR4'. At the same time, Fitch notes that, at end-Q112, retail deposits, which rank senior to other creditors under Ukrainian law, accounted for a high 68% of Privat's non-equity funding. This represents significant subordination for other senior creditors, including bondholders, which could limit recoveries for those creditors in a default scenario. Any further marked increase in bondholder subordination could result in a downgrade of the Recovery Rating, and hence also the Long-term rating, of the debt.
Upside potential for Privat's ratings is currently limited due to the level of Ukraine's sovereign ratings ('B'/Stable), the challenging operating environment and weaknesses in Privat's credit profile. A reduction in borrower and sector concentrations would be positive for the bank's profile, while a marked tightening of the bank's capital position, a liquidity shortfall or rising concerns over the level and quality of related-party exposures could result in a downgrade.
The Outlook revision on Khreschatyk's IDRs reflects the bank's increased and high loan concentrations, including with related parties; the increase in loan restructuring, in particular of some of the largest exposures, which increases uncertainties about future recoveries; and negative pre-impairment profitability, which is undermining capitalisation and has resulted in low loss absorption capacity. At the same time, the ratings consider the bank's currently comfortable liquidity and the absence of any material refinancing risk.
The ratings could be downgraded if recognition of large loan losses cause further erosion of the bank's capital, or if deposit outflows undermine the liquidity position. Marked improvements in the bank's operating performance and asset quality metrics could result in the Outlook being revised back to Stable.
Khreschatyk has remained loss-making during the past three crisis years, with profitability constrained by slow growth, relatively high costs of funding, which is predominantly in UAH, and high loan impairment charges due to the continued deterioration in asset quality. Lending operations remained highly concentrated by borrower: at end-Q112, exposures to the top 20 borrowers accounted for a high 65% of loans and 435% of equity, and related parties accounted for 28% of the bank's loans or 215% of Fitch's Core Capital at end-2011. NPLs (loans overdue for over 90 days) amounted to 9.3% of end-Q112 loans, but restructured/rolled-over exposures accounted for a substantial 68% of the portfolio. Fitch notes continuing uncertainty about the future performance of these exposures, a large proportion of which was from the construction/real estate segment. Fitch estimates that the bank could create reserves equal to 17% of the loan book without breaching the regulatory minimum ratio of 10%.
Khreschatyk is less exposed to exchange rate risk as lending in foreign currencies accounted for 21% of loans. The liquidity position is currently reasonable: a cushion of highly liquid assets covered nearly 22% of client deposits, although retail depositors (around 50% of liabilities) can be sensitive to market rate changes, causing moderate volatility in account balances. Regular recapitalisations from the existing shareholders have supported the capital adequacy ratio at above 10% (end-Q112: 15.9%), although more could be required should asset quality continue to deteriorate.
PB's ratings continue to reflect its high loan book concentration, assets quality concerns associated with the high share of restructured loans and limited loss absorption capacity. The ratings also consider the bank's stable market position in its home region and reasonable liquidity position. At end-Q112, NPLs accounted for a low (compared to the sector's average) 4.4% of the gross portfolio and a further 32% of loans were restructured or rolled-over. In this light, loss absorption capacity is limited, with the bank able to reserve 19% of gross loans before the regulatory capital level would fall to its minimum level.
The bank's liquidity position looks comfortable on a consolidated level given the liquidity cushion held on the balance sheet of Latvian subsidiary Regional Investment Bank (RIB): at end-Q112, highly liquid assets on the consolidated balance sheet were equal to 25% of customer accounts. RIB's ability to provide funds to the Ukrainian parent at times of stress could be limited by the existing regulations in Latvia, although Fitch understands that liquidity may flow indirectly, giving moderate comfort.
Upward pressure on PB's ratings could result from an improvement in asset quality, in particular a reduction in the proportion of restructured exposures, a strengthening of the bank's franchise and an improvement in the operating environment. Negative rating action may be warranted in case of significant impairment losses or deterioration of the liquidity position.
The Negative Outlook on INB's IDRs continues to reflect the risk of a reduction in INB's franchise and business volumes, following changes to the shareholding structure of its related party, Zaporizhstal (ZS; a large domestic steel producer). The finalisation of the sale of a stake in ZS by some of the bank's shareholders is expected in August 2012. INB's ratings also take account of the bank's high level of related party business and restructured loans.
Negative rating action will be warranted in the event of a significant compression of INB's balance sheet after the expected withdrawal of ZS-related business from the bank, which may increase INB's vulnerability to market stresses, reduce its operating efficiency and lead to deterioration in performance. A possible liquidity tightening may also warrant a downgrade, since the bank has reduced its cushion of liquid assets, to around UAH320m at end-H112 (19% of unencumbered deposits). However, the Outlook could return to Stable.
Fitch is also concerned over the quality of INB's economic capital position. Although the bank's regulatory ratio appeared solid at 23% at end-Q112, the quality of the bank's capital is compromised by the high volume of related-party lending, particularly to businesses unrelated to ZS. These exposures accounted for almost half of regulatory capital.. In addition, restructured or rolled-over loans accounted for a significant 40% of the portfolio at end-Q112, reflecting both loosened standards applied for related party borrowers and deterioration in the credit quality of other loans, particularly for real estate exposures. Recognition of credit impairment on INB's restructured loans may put substantial pressure on its capital ratios and also warrant a downgrade.
The rating actions are as follows:
Privat
Long-term IDR: affirmed at 'B'; Outlook Stable
Senior unsecured debt: affirmed at 'B', Recovery Rating 'RR4'
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Bank Khreschatyk
Long-term foreign and local currency IDRs: affirmed at 'B-'; Outlook revised to Negative from Stable
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term rating: affirmed at 'BBB-(ukr)'; Outlook revised to Negative from Stable
Senior unsecured debt: affirmed at 'BBB- (ukr)'

Pivdennyi Bank
Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Industrialbank
Long-term IDR: affirmed at 'B-'; Outlook Negative
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Company — Khreschatyk Bank
  • Full name
    Public joint-stock company Commercial Bank "Khreschatyk"
  • Industry
    Banks