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S&P: Ukraine-Based Ukrsotsbank OJSC L-T Rating Raised To 'BB-'; Off Watch; Outlook Negative

January 25, 2008 | Cbonds

On Jan. 24, 2008, Standard & Poor's Ratings Services raised its long-term
counterparty credit rating on Ukraine-based Ukrsotsbank OJSC (USB) to 'BB-' from 'B' and removed it from CreditWatch, where it had been placed with positive implications on July 6, 2007. At the same time, the 'B' short-term counterparty credit rating on the bank was affirmed. The outlook is negative.

The upgrade follows the acquisition by UniCredito Italiano SpA
(A+/Stable/A-1), through its subsidiary Bank Austria Creditanstalt AG
(A+/Stable/A-1), of a 94.2 % stake in USB. USB stands to benefit from this
transaction in terms of financial flexibility, business development, and risk
management. We consider USB to be a strategically important subsidiary of
UniCredito and expect strong parental support in case of need. The long-term rating on USB consequently includes a two-notch uplift from the bank's stand-alone credit quality.

The ratings on USB reflect the bank's risky operating environment; rapid
loan growth; pressured profitability ratios; tight balance-sheet liquidity;
moderate capitalization; and intensified competition in the Ukrainian banking sector. Positive rating factors are support from the new parent, a good commercial franchise, improving diversification of the business mix and
earnings, and reduced single-name concentrations.

USB is among the top four banks in Ukraine and reported total assets of
Ukrainian hryvnia (UAH) 31 billion ($6 billion) and a market share of over 5% of the system's assets at year-end 2007.

USB is vulnerable to structural weaknesses of the Ukrainian economy,
given the bank's continued rapid lending growth and high--albeit decreased--single-party lending and funding concentrations in a country with an untested credit culture. The bank faces stiff competition from large peers, including those recently acquired by strategic foreign investors. Despite better revenue diversification and strengthening cost controls, profitability ratios have been on a declining trend due to a lower interest margin, and fee income lagging behind other businesses expansion. Positive developments are expected in the medium term, as the business matures and the bank comes out from its current investment stage. Funding concentrations, high lending leverage, and sizable foreign debt repayment add to the bank's liquidity risks, partially mitigated by improving diversification and asset-liability management, and by parental support. Capitalization was strengthened in the first half of 2007 by a UAH650 million capital increase. Nevertheless, we expect continued aggressive growth to put renewed pressure on capitalization ratios in 2008.


The negative outlook mirrors that on Ukraine (foreign currency BB-/Negative/B; local currency BB/Negative/B), and a downgrade of the sovereign would trigger a similar rating action on the bank. However, should the outlook on the sovereign be revised back to stable, that on the bank would also be revised to stable. Similarly, a raising of the foreign currency sovereign rating would trigger an upgrade of the bank. We expect that Unicredito's initiatives to optimize and adapt USB's business model, processes, and internal technologies will allow USB to strengthen its commercial and credit position. The future direction of the ratings will also depend on the level of financial and operational support provided to USB by its strategic shareholder, but also on the evolution of the bank's risk profile and financial performance.

Ratings List
To From
Long-term counterparty credit rating
BB-/Negative B/Watch Pos
Short-term counterparty credit rating
Senior unsecured debt BB- B/Watch Pos

NB: This list does not include all ratings affected.

Company: Ukrsotsbank

Full company nameUkrsotsbank PJSC
Country of riskUkraine
Country of registrationUkraine


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