June 17, 2016 | Cbonds
|Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of PJSC Alfa-Bank (ABU), Ukrsotsbank (Ukrsots), ProCredit Bank (Ukraine) (PCBU), PJSCCB Pravex-Bank (Pravex) and PJSC Credit Agricole Bank (CAB) at 'CCC'. At the same time Fitch has removed Ukrsots and Pravex from Rating Watch Negative (RWN). |
Fitch has also affirmed the banks' VRs: CAB at 'b-', ABU and PCBU at 'ccc' and Ukrsots' and Pravex's VRs at 'cc'. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SENIOR DEBT
All five banks' IDRs and National Ratings factor in the likelihood of support they may receive from their foreign shareholders. The affirmation of the banks' 'CCC' Long-Term Foreign Currency IDRs reflects the constraint of Ukraine's Country Ceiling (CCC), which captures transfer and convertibility risks 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 largely remain in place, albeit having been gradually eased in 1H16.
The affirmation of the five banks' Long-Term Local Currency IDRs, and the senior unsecured local currency debt of ABU and Ukrsots, at 'B-', i.e one notch above the 'CCC' sovereign rating, reflects the strength of the expected shareholder support for these entities. The revision of the Outlooks on Long-term local-currency IDRs to Stable from Negative (with the exception of Pravex) reflects Fitch's view of the somewhat reduced country risks, and in particular the lower risk of extreme scenarios where the banks' ability to service their local currency obligations could be constrained by regulatory action.
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 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 Alfa Group assets and the mixed track record of support from its main shareholders.
Ukrsots is currently nearly 100%-owned by UniCredit S.p.A. (UniCredit, BBB+/Negative) through its Vienna subsidiary UniCredit Bank Austria AG (BBB+/ Negative). In 2015 UniCredit announced that it had signed a binding agreement on the transfer of its share in Ukrsots to ABH Holdings S.A. (ABHH) in exchange for 9.9% of ABHH's shares. ABHH is part of Alfa Group's financial business and is an owner of several CIS banking subsidiaries, including ABU. The deal is expected to be finalised in 2H16, following its approval by the Ukrainian regulatory authorities. Fitch believes UniCredit will continue to provide support to Ukrsots prior to its sale, while the probability of support from ABHH for Ukrsots is likely to be similar to that currently available for ABU. Consequently, Fitch has removed Ukrsots from RWN.
Pravex is fully owned by Intesa Sanpaolo S.p.A. (Intesa, BBB+/Stable). The bank has been up for sale since early 2014. However, given little apparent progress so far with the disposal of the bank and the absence at present of a named potential buyer, Fitch has removed Pravex's ratings from RWN. The Negative Outlook reflects the ultimate likelihood of a sale and hence the probable reduction in potential shareholder support.
PCBU is controlled (87% of voting stock) by Germany's ProCredit Holding AG & Co. KGaA. (BBB/Stable). CAB is fully owned by Credit Agricole S.A. (A/Positive).
All five banks' VRs continue to reflect weaknesses in their standalone credit profiles and dependence on capital support (except for CAB) from their respective parents. Asset quality was under increased pressure in 2015 due to recession (GDP dropped by 9.9%), currency depreciation (FX loans were in the 30%-80% range for these five banks at end-2015) and the military conflict in the east (the banks' reported exposure to the region was in the range of 3%-14% of loans). NPLs (loans more than 90 days overdue) have increased across the board, giving rise to additional reserve requirements, and loan restructuring is widespread. The only moderate economic recovery expected in Ukraine (Fitch forecasts GDP growth of 1% in 2016 with medium-term potential growth of 2%) limits the potential for near-term improvements in asset quality metrics and constrains balance sheet growth and earnings generation.
Regulatory capital adequacy ratios (CARs) were above the regulatory limit of 10% for four banks and, from 13 June 2016 for ABU, which improved its CAR to 10.3% from 6.8% at end-1Q16. However, capital buffers are generally weak relative to unreserved problem assets, and the capacity to absorb losses through pre-impairment profit is also limited (at ABU, Ukrsots, Pravex) due to pressures stemming from a large proportion of non-performing assets, high, albeit decreasing, funding costs (at ABU) and weaker growth/deleveraging. ABU, Ukrsots and Pravex remained loss-making in 2015, while robust pre-impairment performance at PCBU and CAB is supported by continued rapid loan expansion (PCBU), effective asset re-pricing and access to relatively cheap and stable customer funds (CAB), and good cost controls.
Deposit trends have stabilised for the sector and the reviewed banks, underpinned by the recent stabilisation of the hryvnia. Non-deposit funding is limited at these banks and liquidity buffers (cash and equivalents and unpledged securities eligible for refinancing with the National Bank (NBU)), net of near-term wholesale funding repayments, remained comfortable in 1Q16.
CAB's 'b-' VR factors in more moderate asset quality deterioration than at most Ukrainian banks (NPLs at 15% of loans, 80%-covered by specific reserves; restructured loans at 8% and performing), driven by a focus on multinational and agricultural companies. Loss absorption capacity is underpinned by solid pre-impairment profitability (equal to 10% of average loans in 2015), and the liquidity position is sound. The capital buffer is moderate, although the FCC ratio of 7.6% at end-2015 is significantly impacted by group policy of applying a 150% risk weighting to loans in Ukraine and NBU exposures.
ABU's 'ccc' VR captures the high levels of NPLs and restructured/rolled over exposures (33% and 30% of end-2015 gross loans, respectively) and moderate loss absorption capacity, although the latter is supported by a shareholder guarantee that covers potential losses on selected credit exposures. Unreserved NPLs, net of shareholder guarantees, were equal to 3x FCC, and the FCC ratio was a low of 5%. Capital injections in 2016 are unlikely and in 2017 the bank expects to receive USD50m of equity from its shareholder.
PCBU's 'ccc' VR is constrained by the bank's high-risk appetite, as reflected in rapid recent loan growth (by 32% in 2015 and 57% in 2014, adjusted for FX-effects), and risks associated with the largely unseasoned loan book. NPLs and restructured loans stood at 5.6% and 8.8% of end-2015 loans, respectively, which were significantly below sector averages, albeit partly due to regular write-offs. NPLs net of specific reserves were low (13% of FCC at end-2015), but the FCC ratio of 7.5% is modest for the bank's risk profile. An expected EUR15m equity injection in tranches in June-July 2016 (equal to 78% of end-2015 FCC) will support additional loss absorption, but will partially be consumed by loan growth.
The 'cc' VRs of Ukrsots and Pravex reflect both banks' high levels of NPLs, at around 70% of end-2015 gross loans, and their moderate coverage by specific reserves (43% at Ukrsots and 72% at Pravex) and significant negative pre-impairment profit, which is resulting in ongoing capital consumption. Ukrsots' capital buffer (FCC ratio of 29% at end-1Q16) has improved since end-2014 as a result of recapitalisation measures, but is still not sufficient to improve NPL-coverage to 80%. However, Fitch understands further capital support is expected before the bank sale. Pravex's capital buffer (FCC ratio of 78% at end-2015, up from 11% at end-2014 following a large capital injection) is sufficient to allow full coverage of NPLs, but the buffer is likely to be eroded by operating losses.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
The banks' IDRs could be upgraded if Ukraine's sovereign ratings are upgraded and the Country Ceiling revised upwards. 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 (not the base case scenario for Fitch).
A significant weakening of the ability and/or propensity of shareholders to provide support (not expected by Fitch at present) could also result in downgrades.
The Negative Outlook on Pravex's ratings reflects Fitch's expectation that the bank will ultimately be sold. If a sale goes ahead, we will review the bank's ratings to assess the ability and propensity of the new shareholder to provide assistance. If the sale does not go through or is significantly delayed, the bank's IDRs will remain sensitive to the factors above.
Upside potential for the banks' VRs is limited, but could arise from a strengthening of their capitalisation and improvements in reserve coverage of impaired loans. The VRs could be downgraded if additional loan impairment recognition undermines capital positions without sufficient support being made available.