Fitch Affirms 3 Ukrainian Banks at 'CCC'
The banks' IDRs are driven by their standalone strength, as reflected in their 'ccc' Viability Ratings. However, the IDRs of Ukreximbank and Oschadbank are also underpinned by potential state support.
KEY RATING DRIVERS - VIABILITY RATINGS, IDRS, NATIONAL RATINGS, SENIOR DEBT
The banks' 'CCC' Long-term IDRs and 'ccc' VRs primarily reflect the highly stressed operating environment, which has resulted in weaker asset quality, greater deposit instability, higher funding costs and weaker performance. Ukreximbank and Oschadbank's foreign currency liquidity positions are tight, given upcoming bond repayments, although their capital positions are somewhat better than at other Ukrainian banks. PB has lower refinancing risks, but a significantly weaker capital position.
Ukreximbank faces a USD750m Eurobond repayment in April 2015. Management has informed Fitch that as of today, the bank has not yet accumulated sufficient foreign currency liquidity to repay the Eurobond in full. The bank plans to source additional foreign currency from loan repayments in 1Q15. However, in case of lower than expected repayments and/or foreign currency deposit outflows, in Fitch's view, the bank would be reliant on open market purchases or the availability of foreign currency liquidity from the National Bank of Ukraine (NBU) in order to repay the Eurobond.
Oschadbank has a USD700m Eurobond maturing in March 2016, and will also need to accumulate additional foreign currency liquidity in order to make this payment.
Recent deposit outflows have generally been manageable for each of the three banks, helped by previously accumulated cash cushions, regulatory restrictions on cash withdrawals and so far available UAH-liquidity support from the NBU.
Problem assets are large at each of the three banks, including non-performing loans (NPLs, loans more than 90 days overdue) at 9% (PB), 15% (Ukreximbank) and 21% (Oschadbank), and restructured/rolled over exposures in the range of 25%-40% of end-9M14 loans. In most cases NPLs have been reasonably provisioned and/or collateralised. Downside risks stem from restructured/rolled over portfolios, including moderately provisioned exposures to borrowers from the Donetsk and Luhansk regions and the Crimea (13%-14% of loans at Oschadbank and Ukreximbank; a much smaller proportion at PB), creating potential for further increases in credit losses. Lending in foreign currencies was in the range of 42%-64% of end-9M14 net loans for the three banks, and most borrowers are effectively unhedged.
Ukreximbank and Oschadbank's asset quality also remains significantly correlated with the sovereign's credit profile due to the banks' large exposure to sovereign debt (1.1x Fitch core capital, FCC, at end-1H14 for Oschad and 1.7x FCC for Ukrexim), both in local and foreign currencies, and to the public sector more generally (more notably at Oschadbank, given its lending to NJSC Naftogaz of Ukraine; CCC), and some risk that this exposure could grow further given pressure on government finances.
Performance has been weak at all three banks, with large loan impairment charges affecting bottom line performance in 2014 at Ukreximbank and Oschadbank. Following capital injections in 4Q14 (in the form of sovereign bonds), the two state-owned banks could have provisioned around 42%-45% of loans without breaching regulatory capital ratios (CAR). However, this buffer should be viewed in light of the large sovereign debt exposure, while asset quality continues to deteriorate rapidly in the high-risk operating environment.
PB's capital is under pressure, with the regulatory CAR of 10.8% at end-11M14 close to the regulatory minimum level of 10%, while the bank is trying to attract subordinated debt in order to support its solvency.
KEY RATING DRIVERS - SUPPORT RATING FLOORS AND SUPPORT RATINGS
The affirmation of the Support Rating Floors and Support Ratings of Ukreximbank and Oschadbank reflects Fitch's view of the Ukrainian authorities' still quite high propensity to provide support to these two banks. This view takes into account the banks' 100%-state ownership, policy roles, high systemic importance, and the track record of capital support for the banks under different governments. However, the authorities' ability to provide support, in case of need, remains limited, as indicated by the sovereign's 'CCC' IDRs.
KEY RATING DRIVERS AND SENSITIVITIES - UKREXIMBANK'S SUBORDINATED DEBT
The affirmation of Ukreximbank's subordinated debt rating at 'C', the lowest possible issue rating, reflects the affirmation of the bank's VR. The two-notch differential between the bank's VR of 'ccc' and the subordinated debt rating of 'C' reflects one notch for incremental non-performance risk (resulting from the flexibility to defer coupons in certain circumstances, for example if the bank reports negative net income for a quarter) and one notch for potentially weaker recoveries due to the instrument's subordination. To date, the bank has not deferred a coupon payment on its subordinated debt. The rating could be upgraded in case of an upgrade of the bank's VR.
RATING SENSITIVITIES - ALL RATINGS
The banks' IDRs and VRs would not automatically be downgraded in case of a further sovereign downgrade/debt restructuring, as the banks' low ratings already reflect very high levels of credit risk. However, the banks' IDRs and debt ratings could be downgraded in case of transfer and convertibility restrictions being imposed which would restrict their ability to service their obligations.
The ratings of Ukreximbank and Oschadbank could be downgraded if they fail to accumulate sufficient foreign currency to meet upcoming debt repayments. Conversely, a strengthening of their foreign currency liquidity would significantly reduce near-term default risk and help the ratings stabilise at their current levels.
PB could be downgraded if its capitalisation suffers a further sharp deterioration due to either continued UAH depreciation or weaker asset quality. Capital injections would reduce downside risk for the bank's ratings.
The rating actions are as follows:
Ukreximbank:
Long-term foreign currency and local currency IDRs: affirmed at 'CCC'
Senior unsecured debt of Biz Finance PLC: affirmed at 'CCC'/Recovery Rating 'RR4'
Subordinated debt: affirmed at 'C'/Recovery Rating 'RR5'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'CCC'
Viability Rating: affirmed at 'ccc'
National Long-term rating: affirmed at 'AA-(ukr)'; Outlook Stable
Oschadbank:
Long-term foreign currency and local currency IDRs: affirmed at 'CCC'
Senior unsecured debt of SSB No.1 PLC: affirmed at 'CCC'/Recovery Rating 'RR4'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'CCC'
Viability Rating: affirmed at 'ccc'
National Long-term rating: affirmed at 'AA-(ukr)'; Outlook Stable
Pivdennyi Bank:
Long-term foreign currency IDR: affirmed at 'CCC'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Viability Rating: affirmed at 'ccc'
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