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Moody's downgrades Prominvestbank's ratings to B3; outlook negative

August 23, 2013 | Moody's Investors Service

Moody's Investors Service has today downgraded Prominvestbank's long-term global local-currency debt and deposit ratings to B3 from B2. Concurrently, Moody's downgraded the bank's standalone bank financial strength rating (BFSR) to E from E+, which now is equivalent to a baseline credit assessment (BCA) of caa1 (formerly b3), and the bank's National Scale Rating (NSR) to Baa3.ua fom A3.ua. At the same time, the rating agency affirmed Prominvestbank's Caa1 long-term foreign-currency deposit rating and the Not-Prime short-term global local- and foreign-currency deposit ratings. The BFSR carries a stable outlook and long-term deposit and debt ratings have a negative outlook, while the NSR carries no specific outlook.

Moody's rating action on Prominvestbank's ratings is primarily based on the bank's audited financial statements for 2012 prepared under IFRS.

RATINGS RATIONALE

Moody's downgrade of Prominvestbank's long-term global local-currency debt and deposit ratings reflects the bank's weak capital profile that is suppressed by loss-making performance in five consecutive years (2008-12). Prominvestbank's standalone BFSR continues to be constrained by its high credit risk appetite as reflected by very high single-name concentrations in the loan book. The rating agency has also lowered its parental support assumptions embedded in Prominvestbank's debt and deposit ratings, mainly because of the uncertainty that surrounded the timeliness of capital support provided to Prominvestbank from its parent -- the Russian state-owned corporation Vnesheconombank (Baa1, stable) in Q2 2013.

WEAK CAPITAL PROFILE

Prominvestbank reported a modest pro-forma Tier 1 capital adequacy of 8.93% as at year-end 2012, which incorporates the shareholder's (Vnesheconombank) promise to convert its long-term subordinate loan of UAH2.9 billion (US$365 million) into Tier 1 capital. In 1H 2013 the bank's shareholders took formal decision to inject capital, which came in Q2 2013 and is subject to the final regulatory registration. Moody's estimates that in the absence of this capital support, the bank's Tier 1 capital adequacy ratio will be close to 4% and regulatory capital adequacy ratio would fall well below the regulatory minimum of 10%, which the rating agency would consider to be a standalone insolvency.

In addition, Prominvestbank's loss absorption capacity is undermined by very high single-name concentrations with top-20 credit exposures accounting for over 480% of the bank's Tier 1 capital (as of 1 January 2013), rendering the bank's profitability and capitalisation vulnerable to the performance of a handful of borrowers.

LOSS-MAKING FOR FIVE CONSECUTIVE YEARS

Prominvestbank's loss-making performance during the period 2008-12 was mainly driven by (1) the need for increased loan loss reserves; (2) low net interest margin of 3.4% in 2012 (2011: 4.4%); and (3) weak cost efficiency, with a cost-to-income ratio of 78.7% (2011: 79.2%). The bank's adoption of an aggressive lending strategy prior to the onset of the global financial crisis in 2008 resulted in crystallisation of losses in the period 2008-12, when the deterioration in the performance of corporate borrowers required provisions that resulted in negative bottom-line earnings. We expect that the bank's financial performance will remain weak in 2013 and 2014, particularly because its impaired loans (which account for 24% of the loan book) are 60% covered by provisions, while challenging credit conditions provide limited opportunity for recovery of its asset quality and net interest margin.

MODERATE PROBABILITY OF PARENTAL SUPPORT

Moody's reassessment of the probability of parental support for Prominvestbank to moderate from high was driven by uncertainty surrounding the capital support. The rating agency also sees the prospect of "parental support fatigue" going forward, and notes that Vnesheconombank and its subsidiaries are already funding around 50% of Prominvestbank's liabilities (including subordinated debt). Vnesheconombank's total exposure to Prominvestbank (including capital and funding) is very high and amounted to US$2.6 billion at year-end 2012, or around 16% of the Vnesheconombank's tangible common equity as at 1 January 2013), which is indicative of its lower willingness and capacity to support the subsidiary which Moody's considers as non-strategic for the group.

WHAT COULD MOVE THE RATINGS UP / DOWN

The outlook on Prominvestbank's long-term ratings could be changed to stable if the bank (1) strengthens its capital base on the back of substantial improvement its profitability and cost-efficiency indicators; and (2) materially reduces its credit risk concentrations. Prominvestbank's ratings could be downgraded in the event of continued loss-making performance that could lead to weaker capital adequacy levels in the absence of parental support.

The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Kyiv, Ukraine, Prominvestbank reported consolidated total assets of UAH38.2 billion (US$4.8 billion) as of 31 December 2012 (in accordance with audited IFRS).

Moody's National Scale Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale ratings, please refer to Moody's Rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

Company: Prominvestbank

Full company nameProminvestbank
Country of riskUkraine
Country of registrationUkraine
IndustryBanks

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