January 26, 2007 | Cbonds
|Moscow, January 26, 2007 -- Moody's Investors Service, Inc assigned the following global scale ratings to CJSC First Ukrainian International Bank ("FUIB" or "the bank"): B2 long-term and Not Prime short-term local and foreign currency deposit ratings, a B2 long-term foreign currency debt rating and an E+ financial strength rating ("FSR"). Moody's also assigned an A1.ua long-term national scale rating ("NSR") to FUIB. The bank's global scale ratings carry a stable outlook, while the NSR carries no specific outlook.|
According to Moody's, the bank's B2/Not Prime global scale local currency ratings reflect its global default and loss expectation and are not constrained by any foreign currency transfer risk, while the A1.ua national scale rating reflects the standing of the bank's credit quality relative to its domestic peers.
FUIB's B2/NP/E+ ratings are underpinned by its relatively long track record of cooperation with both multilateral financial institutions and western commercial banks, which, in Moody's view, supports FUIB's foothold in the Ukrainian corporate banking sector and benefits its franchise strength. The ratings also reflect the bank's relatively conservative risk appetite, compared to many Ukrainian peers, as reflected in its historically low level of non-performing loans and reasonable asset quality as well as its relatively developed risk management procedures and a corporate governance structure that is better than that of many of its peers. In addition, FUIB's ratings reflect its adequate liquidity and good capital management, in part reflected in the target Basel capital adequacy ratio of a sound 19%.
However, the bank's ratings are constrained by its partial reliance for funding on the SCM group, FUIB's shareholder, which also controls its sister bank (Dongorbank - DGB) and a number of industrial assets in Ukraine, and by its persistent concentration of business within the highly competitive corporate sector in Ukraine. Other factors constraining the ratings include (i) the high levels of single-name concentrations on both sides of the balance sheet, (ii) a track record of modest profitability, and (iii) Moody's concerns that DGB, which is financially weaker, represents some degree of contingent liability where FUIB could be brought to extend support to its sister bank in case of need.
The bank's B2/Not Prime long- and short-term local and foreign currency deposit ratings are directly linked to its FSR and do not incorporate any element of government support, given its low importance for the Ukrainian banking sector and economy. Support from the SCM group is possible, as was reflected during December 2004 mini-crisis when the bank received liquidity support from the SCM group (although it could have withstood the crisis without support) and recent capital injections. Moody's explained that, although parental support (either directly from the SCM group's owner, Rinat Akhmetov, or through one of his companies) cannot be completely ruled out, there is not sufficient certainty about the timeliness and extent of such support to allow it to enhance the bank's deposit ratings above the level commensurate with its intrinsic financial strength; such support is therefore imputed in the bank's B2 deposit rating only to a limited extent. The rating agency also views Mr. Akhmetov's status as a politically connected person as giving rise to a host of potential political risks for FUIB.
If the bank successfully executes its strategy to diversify its business into the retail and SME sector, this could have positive rating implications, provided it is supported by an improvement in financial fundamentals. In addition, diversification of funding away from related-parties as well as further improvements in corporate governance procedures and further institutionalisation could also exert upward pressure on the ratings. Conversely, any significant asset quality and/or liquidity problems or a rise in the level of related-party transactions would have negative rating implications. The FSR presents little downside potential in the near term.
Moody's has also assigned a B2 long-term foreign currency debt rating to the upcoming issue of Loan Participation Notes (LPNs) to be issued by Standard Bank plc (UK) on a limited recourse basis for the sole purpose of funding a senior unsecured loan to FUIB. The outlook for the rating is also stable.
Moody's understands that the underlying loan agreement according to which the proceeds from the Eurobond issuance will be on-lent by Standard Bank plc (UK) to FUIB contains a set of covenants such as negative pledge, cross default, maintenance of capital adequacy, limitations on mergers, disposals, transactions with affiliates and restricted payments. The rating agency notes that, while the likelihood of any of the above covenants being triggered is relatively low, if such were to occur, it could potentially have adverse liquidity implications for the bank and might exert severe downward pressure on its ratings. Moody's cautions that the transaction also has an embedded rating trigger whereby the notes will become payable if, during the six months following a change of control of FUIB, the outlook on its ratings is changed to negative or if the ratings themselves are downgraded or withdrawn. If the noteholders' put option were to be exercised, this could result in a need to repay a sizeable obligation, thus putting a burden on the bank's financial resources.