Fitch Affirms 4 Ukrainian Foreign-Owned Banks; Places Further 2 on RWN
At the same time, Fitch has downgraded Ukrsotsbank's (Ukrsots) and PJSCCB Pravex-Bank's (Pravex) Viability Ratings (VRs) to 'cc' from 'ccc' and, following this, has placed both banks' 'CCC' Long-term foreign-currency IDRs on Rating Watch Negative (RWN).
Fitch has also affirmed PIB's, PCBU's and ABU's VRs at 'ccc' and CAB's VR at 'b-'. A full list of rating actions is available at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
All six banks' IDRs and National Ratings factor in the likelihood of support the banks may receive from their foreign shareholders. The affirmation of the four banks' 'CCC' Long-term foreign-currency IDRs and ABU's foreign currency senior debt ratings reflects the constraint of Ukraine's Country Ceiling (CCC), which captures the risk of transfer and convertibility restrictions and limits the extent to which support from the majority foreign shareholders of these banks can be factored into the ratings.
The limited capital and currency controls introduced in 1H14 remain largely in force. Ukraine's Country Ceiling reflects the high risk of these controls being tightened further, to the extent that these would materially constrain or impede the private sector's ability to repay external debt.
The affirmation of the four banks' Long-term local-currency IDRs and PCBU's and ABU's senior unsecured local currency debt at 'B-', i.e one notch above the 'CCC' sovereign rating, reflects the strength of the shareholder support for these entities. The Negative Outlooks, however, take into account country risks, and in particular the risk, in extreme scenarios, of restrictions being placed on banks' ability to service their local currency obligations.
PIB is almost fully owned by Russian state-owned Vnesheconombank (VEB, BBB-/Negative); PCBU is controlled (80% of voting stock) by Germany's ProCredit Holding AG & Co. KGaA. (BBB/Stable); and CAB is fully owned by Credit Agricole S.A. (A/Stable).
ABU's IDRs and senior debt ratings are driven by Fitch's view on potential support the bank may receive from other assets controlled by its main shareholders, including from its sister bank, Russia-based OJSC Alfa-Bank (AB; BB+/Negative). However, the probability of support is limited due to the indirect relationship with other group assets and the mixed track record of support from its main shareholders.
Ukrsots is 99.4%-owned by UniCredit S.p.A. (UniCredit, BBB+/Stable) through its Vienna subsidiary UniCredit Bank Austria AG (BBB+/Stable) and Pravex is fully owned by Intesa Sanpaolo S.p.A. (Intesa, BBB+/Stable). Both Ukrsots and Pravex remain up for sale after their parents made relevant announcements in early 2014, although there has been little progress so far given the difficult operating environment in Ukraine. Both parents target sale of their Ukrainian subsidiaries as soon as the opportunity arises. Fitch believes that current shareholders will likely have a high propensity to provide support to their Ukrainian subsidiaries prior to sale.
Following the downgrades of Ukrsots' and Pravex's VRs, their Long-term foreign-currency IDRs are no longer underpinned by their standalone creditworthiness. The Rating Watch Negative (RWN) on both banks' foreign and local currency IDRs and National Ratings reflects Fitch's view that shareholder support will probably become less reliable if the banks are sold, in particular to local shareholders.
VRs
All six banks' VRs capture the high pressure on their standalone creditworthiness from the distressed operating environment. They face a deepening recession (Fitch forecasts GDP to contract by 9% in 2015), sharp hryvnia (UAH) depreciation (the official UAH/USD exchange rate or is down by 35% year-to-date after a fall by 97% in 2014), ensuing inflation (annual consumer inflation of 58% in May 2015), and an unresolved military conflict in eastern Ukraine, causing widespread economic dislocations.
Ukrainian banks' credit profiles have deteriorated markedly since the beginning of 2014 as a result of sharply increased loan impairments, erosion of capital (due to credit losses and devaluation-driven inflation of FX assets) and funding pressures (due to continuing deposit outflows).
Capital has remained under more pressure than liquidity since the beginning of 2014, particularly in 1Q15 when most of the reviewed banks (with the exception of CAB and PCBU) breached the minimum regulatory capital adequacy ratio of 10%, before receiving capital support from parents (through conversion of parent funding to Tier 1 equity in the case of Ukrsots, PIB, and by cash contributions for PCBU and Pravex). ABU is still reliant on the regulatory forbearance made available to all sector banks in respect to non-compliance with capital requirements.
Deposit outflows have been manageable for each of the six banks, helped by regulatory restrictions on cash withdrawals of deposits and liquidity support from parent banks. Liquidity buffers (comprising cash and equivalents and unpledged securities eligible for refinancing with the central bank), net of near term wholesale funding repayments, remained at comfortable levels at end-1Q15 or end-4M15, in the range of 13% (ABU) to 52% of customer deposits (PIB, mostly reflecting a high reliance on parent funding - at 68% of end-1Q15 liabilities).
The downgrades of Ukrsots' and Pravex' VRs to 'cc' from 'ccc' reflect (i) both banks' very high levels of impaired loans, with NPLs (loans more than 90 days overdue) and restructured exposures together comprising approximately 80% of gross loans at end-1Q15; and (ii) insufficient loss absorption capacity, due both to modest or negligible equity buffers, (despite capital increases in 5M15) and negative pre-impairment profitability in 2014-1Q15 (net of accrued interest income). Unreserved NPLs accounted for a large 2.3-3.3x of these banks' Basel capital at end-1Q15, making both of them still highly reliant on capital support. Restructured exposures, which would otherwise have been NPLs if not for restructuring, also represent significant downside risks.
The 'ccc' VRs of PIB, PCBU and ABU reflect high levels of impaired loans (NPLs and restructured exposures ranging from 20% at PCBU to 92% at PIB) and moderate loss absorption capacity, also taking into account recent or upcoming capital increases in 2015. The ratings also take into account that the three banks' reported NPLs are generally well covered by reserves and/or through credit enhancement (ABU).
CAB's 'b-' VR reflects less asset quality deterioration than at most Ukrainian banks, still solid pre-impairment profitability, manageable exposure to FX risks and a sound liquidity position.
RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The banks' IDRs would not automatically be downgraded in case of a sovereign downgrade/debt restructuring. However, the ratings could be downgraded in case of transfer and convertibility or other restrictions being imposed, which would impede the banks' ability to service their obligations.
Aside of Ukrsots and Pravex, the Stable Outlooks on the National Ratings reflects Fitch's view that any future deterioration in these banks' credit profiles is likely to be broadly in line with that of other Ukrainian issuers, meaning that the banks' default risk relative to other issuers will remain broadly unchanged.
Fitch expects to resolve the RWN on Ukrsots' and Pravex's ratings once the sales, should they take place, are completed. If, in Fitch's view, support from new shareholders cannot be factored into the ratings, then the Long-term IDRs of these two banks are likely to be downgraded to the levels of their VRs (cc).
VRs
Upside potential for VRs is limited, but could arise from a strengthening of banks' capital positions and improvements in reserve coverage of impaired loans. Stabilisation of the country's economic prospects would reduce downward pressure on the VRs. The VRs could be downgraded if additional loan impairment recognition undermines capital positions without sufficient support being made available.
The rating actions are as follows:
PJSC Prominvestbank:
Long-term foreign currency IDR: affirmed at 'CCC'
Long-term local currency IDR: affirmed at 'B-', Outlook Negative
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Viability Rating: affirmed at 'ccc'
National Long-term Rating: affirmed at 'AAA(ukr)'; Outlook Stable
Ukrsotsbank:
Long-term foreign currency IDR: 'CCC', placed on RWN
Long-term local currency IDR: 'B-', maintained on RWN
Senior unsecured local currency debt: 'B-'/ 'RR4'/ 'AAA(ukr)', maintained on RWN
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Viability Rating: downgraded to 'cc' from 'ccc'
National Long-term rating: 'AAA(ukr)', maintained on RWN
ProCredit Bank (Ukraine):
Long-term foreign currency IDR: affirmed at 'CCC'
Long-term local currency IDR: affirmed at 'B-', Outlook Negative
Senior unsecured local currency debt: affirmed at 'B-'/ 'RR4'/ 'AAA(ukr)
Short-term foreign currency IDR: affirmed at 'C'
Short-term local currency IDR: affirmed at 'B'
Support Rating: affirmed at '5'
Viability Rating: affirmed at 'ccc'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable
Pravex:
Long-term foreign currency IDR: 'CCC', placed on RWN
Long-term local currency IDR: 'B-', maintained on RWN
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Viability Rating: downgraded to 'cc' from 'ccc'
National Long-term rating: 'AAA(ukr)', maintained on RWN
CAB:
Long-term foreign currency IDR: affirmed at 'CCC'
Long-term local currency IDR: affirmed at 'B-', Outlook Negative
Short-term foreign currency IDR: affirmed at 'C'
Short-term local currency IDR: affirmed at 'B'
Support Rating: affirmed at '5'
Viability Rating: affirmed at 'b-'
National Long-term Rating: affirmed at 'AAA(ukr)'; Outlook Stable
PJSC Alfa-Bank:
Long-term foreign currency IDR: affirmed at 'CCC'
Long-term local currency IDR: affirmed at 'B-', Outlook Negative
Senior unsecured local currency debt: affirmed at 'B-'/'RR4'/ 'AA+(ukr)'
Upcoming senior unsecured local currency debt: affirmed at 'B-(EXP)'/'RR4'/'AA+(EXP)(ukr)'
Upcoming senior unsecured local currency market linked securities: affirmed at 'B-(EXP)(emr)'/'RR4'; 'AA+(EXP)(ukr)(emr)'
Senior unsecured debt of Alfa Ukrfinance LLC: affirmed at 'CCC'/'RR4'
Short-term foreign currency IDR: affirmed at 'C'
Support Rating: affirmed at '5'
Viability Rating: affirmed at 'ccc'
National Long-term rating: affirmed at 'AA+(ukr)'; Outlook Stable
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