OREANDA-NEWS. December 08, 2015. Fitch Ratings has upgraded PJSC CB PrivatBank's (Privat) Long-term foreign currency Issuer Default Rating (IDR) to 'CCC' from 'RD' (Restricted Default) on completion of the bank's external debt restructuring. The Viability Rating (VR) has also been upgraded to 'ccc' from 'f'. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS - VR
The upgrade of the bank's VR to 'ccc' reflects Fitch's assessment of the bank's standalone profile following its external debt restructuring. Specifically, the upgrade reflects reduced near-term refinancing requirements, as the restructuring of the bank's senior Eurobonds, originally due in September 2015, and subordinated notes (not rated by Fitch) originally due in February 2016 (with a combined nominal value of USD350m, or 3% of end-3Q15 liabilities under local GAAP) resulted in a lengthening of the external debt maturity profile.

At end-3Q15, the bank's reported foreign currency liquidity (comprising cash and equivalents and short-term interbank placements) of around USD930m was comfortably sufficient to meet near-term wholesale funding maturities, although the stability of the bank's highly dollarised deposit funding is also key to maintaining FX liquidity. Net of scheduled external wholesale debt repayments in the next 12 months, FX liquidity covers around 17% of FX-deposits.

The bank's VR also considers (i) reduced pressure from deposit volatility (adjusted for FX-effects, deposit outflows moderated to 2% in 9M15, after a large 22% in 2014) and the availability of liquidity support, in hryvnia, from the National Bank of Ukraine (NBU), in particular to systemically important institutions such as Privat (market share in retail deposits: 32%); and (ii) the bank's compliance with prudential capital requirements (regulatory capital ratio of 10.7% at end-November 2015, up from 9.1% at end-1Q15, vs. the minimum level of 10%). The latter was supported by the recent restructuring of USD150m of subordinated debt, which is now due in 2021 and fully included in regulatory capital. An additional USD70m of subordinated debt raised from the bank's shareholders in 4Q15 (not yet recognised in the regulatory capital, pending NBU registration) will provide a further moderate uplift to the regulatory capital ratio to above 11%.

The VR remains constrained by the difficult operating conditions and resultant pressures on asset quality, performance and capital. The bank's reported non-performing loans (NPLs, loans more than 90 days overdue) at 8% of gross loans, remained significantly below sector average levels at end-1H15, after regular write-offs and the transfer (in 4Q14) of the Crimean exposures to an unconsolidated entity controlled by the bank's shareholders. At the same time, individually impaired loans (not yet past due) remained sizeable at 28% of loans between end-2014 and end-1H15. Reserve coverage of NPLs and individually impaired loans was low, at 32% at end-1H15. Large borrower and sector concentrations (the largest oil trading segment accounted for 19% of loans) and the material share of FX-lending (43%), mostly to unhedged borrowers, are additional sources of credit risk.

We expect pressure on capital to remain considerable given large unreserved problem assets, weak financial performance, which is constrained by high funding and credit risk costs, and the only moderate economic recovery forecasted for 2016-2017. The bank's equity cushion offers negligible loss-absorption capacity, while pre-impairment profit, adjusted for accrued revenues not paid in cash, is negative (in 1H15, as per IFRS). The asset quality review and capital stress test planned by the NBU for Ukrainian banks in 2016 will likely reveal additional provisioning and recapitalisations needs. However, regulatory forbearance will allow sector banks to restore solvency only gradually, from the new minimum requirement of 5% from January 2016 to 10% by end-2018.

KEY RATING DRIVERS - IDRS, NATIONAL RATING, SENIOR DEBT AND SUPPORT RATINGS
The upgrade of Privat's Long-term foreign currency IDR and senior debt rating to 'CCC' and the affirmation of its Long-term local currency IDR at 'CCC' are driven by the upgrade of its VR.

The upgrade of Privat's senior unsecured debt ratings to 'CCC'/'RR4' also reflects a re-assessment of the recovery prospects for senior creditors in case of default, which Fitch now views as average. Bondholders are subordinated to retail deposits (56% of non-equity funding at end-3Q15) and could suffer as a result of significant asset encumbrance (25% of Privat's gross loans pledged against NBU funding). However, in Fitch's view Privat would be unlikely, in case of default, to be forced into bankruptcy or liquidation procedures and a fire sale of assets, due to its sizable market shares and systemic importance, and this reduces downside recovery risks for bondholders resulting from subordination and encumbrance.

Privat's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support cannot be relied upon given the limited ability of the sovereign to provide support, in particular, in foreign currency, and limited transparency on the ability of the bank's shareholders to provide assistance.

The affirmation of the bank's National rating reflects Fitch's view that the bank's creditworthiness relative to other Ukrainian issuers has not changed significantly.

RATING SENSITIVITIES -ALL RATINGS
The bank's VR, IDRs, senior debt ratings and National rating could be downgraded if further deterioration in asset quality results in capital erosion, without sufficient support being provided by the shareholders, or if deposit outflows sharply erode the bank's liquidity, in particular in foreign currency.

Stabilisation of the country's economic prospects, combined with strengthening of the bank's loss absorption capacity, would reduce downward pressure on the ratings. However, an upgrade of the bank is unlikely without an upgrade of the sovereign ratings.

The rating actions are as follows:

Long-term foreign-currency IDR: upgraded to CCC' from 'RD'
Short-term IDR: upgraded to 'C' from 'RD'
Viability Rating: upgraded to 'ccc' from 'f'
Long-term local currency IDR: affirmed at 'CCC'
Restructured senior unsecured USD200m eurobond of UK SPV Credit Finance plc due on 23 January 2018: upgraded to 'CCC'/Recovery Rating 'RR4' from 'C'/Recovery Rating 'RR4'
Non-restructured senior unsecured USD175m eurobond of UK SPV Credit Finance plc due on 28 February 2018: upgraded to 'CCC'/Recovery Rating 'RR4' from 'CC'/Recovery Rating 'RR5'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
National Long-term rating: affirmed at 'A-(ukr)', Outlook revised to Negative from Stable