August 09, 2016 | Cbonds
|Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of JSC The State Export-Import Bank of Ukraine (Ukreximbank) and JSC State Savings Bank of Ukraine (Oschadbank) at 'CCC'. A full list of rating actions is at the end of this rating action commentary.|
The banks' IDRs are driven by their standalone strength, as reflected by their 'ccc' Viability Ratings (VRs).
KEY RATING DRIVERS
VIABILITY RATINGS, IDRS, NATIONAL RATINGS AND SENIOR DEBT
The banks' 'CCC' Long-Term IDRs and 'ccc' VRs reflect weaknesses in both banks' credit profiles, in particular, high loan impairment, weak pre-impairment profitability and low capital ratios. As a result of this, both banks will be reliant on further solvency support should asset quality continue to deteriorate.
The ratings also consider the still difficult, albeit gradually stabilising operating environment, reasonable coverage of existing non-performing loans (NPLs, loans more than 90 days overdue) by loan impairment reserves (LIR), reduced near-term refinancing risks following both banks' Eurobond restructurings in 2015, stabilised deposit trends, underpinned by the recent stabilisation of the hryvnia, and solid liquidity cushions.
Both banks' standalone credit profiles are strongly linked with that of the sovereign due to their large exposure to sovereign debt and, more generally, the public sector, and the dependence of credit quality on the authorities' ability to support macroeconomic stability and public sector corporates. At end-1Q16, direct sovereign exposure (claims on the government and the central bank) relative to Fitch Core Capital (FCC) was 25.5x at Ukreximbank and 5.6x at Oschadbank. Loans issued to state-owned corporates contributed a further 6.6x FCC and 2x FCC, respectively.
Asset quality came under increased pressure in 2015-1Q16 due to recession (GDP dropped by 9.9% in 2015), currency depreciation (FX loans were 50% of the total at Oschadbank at end-1Q16, and 78% at Ukreximbank) and the unresolved conflict in the east.
At end-1Q16, NPLs were reported at 39% of loans at Ukreximbank and 47% at Oshadbank, while total LIR provided reasonable NPL coverage (100% at Ukreximbank and 86% at Oschadbank). Restructured exposures are sizeable at both banks (46% at Ukreximbank; 26% at Oschadbank, of which 13% is represented by state-owned Naftogaz ('CCC'), with some of these being fairly high risk and a potential source of additional asset quality problems in the near term. These are provisioned at various levels, mainly reflecting the borrower performance track record post restructuring. Fitch expects only moderate economic recovery in Ukraine (we forecast GDP growth of 1% in 2016 with medium-term growth of 2%), which limits the potential for near-term improvements in asset quality metrics and constrains balance sheet growth and earnings generation. However, Fitch understands that additional provisioning requirements following the regulator's recent asset quality review should be moderate.
Loss absorption capacity is limited relative to the levels of problem assets, despite recent capital support provided by the authorities to both banks. At end-1Q16, Oschadbank had a regulatory capital adequacy ratio (CAR) of 12.8% (regulatory minimum: 10%), which allowed the bank to increase its LIR by 3.7% without breaching regulatory capital requirements. Ukreximbank with its regulatory CAR of 9.2% at end-1H16 had no capacity to absorb additional losses through equity and remained reliant on the sector-wide regulatory forbearance with respect to non-compliance with capital requirements. Pre-impairment profit, net of interest income accrued but not received in cash, was negative at both banks in 1Q16. Moderate equity injections in 2017, following the asset quality review, are possible, in Fitch's view.
Direct market risks remain high due to large short open currency positions (OCP), which expose the banks to revaluation losses in case of hryvnia depreciation. However, actual positions are smaller, when adjusted for USD-linked government bonds held by both banks and treated as UAH assets for OCP purposes.
At end-May, 2016, the banks' foreign currency liquidity (comprising cash and equivalents and short-term interbank placements) was comfortably sufficient to meet near-term wholesale funding maturities, although the stability of the banks' highly dollarised deposit funding (end-1Q16: 74% of the total at Ukreximbank and 47% at Oschadbank) is also key to maintaining FX liquidity. FX liquidity will start to be used in 2019, when the banks' restructured Eurobonds begin to amortise.
The presence of public sector corporates in the deposit bases (end-1Q16: 48% of client funds at Ukreximbank and 26% at Oschadbank) should result in somewhat greater predictability of client flows. Liquidity in local currency is comfortable and underpinned by large holdings of unpledged government securities eligible for refinancing with the National Bank of Ukraine (37% of assets at Ukreximbank and 26% at Oschadbank at end-1H16).
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The affirmation of the Support Rating Floors at 'No Floor' and Support Ratings at '5' reflects Fitch's view of the Ukrainian authorities' still limited ability to provide support to the banks, in particular in foreign currency, in case of need, as indicated by the sovereign's 'CCC' Long-Term Foreign Currency IDR. However, the propensity to provide support to these two banks remains high, particularly in local currency. This view takes into account the banks' 100%-state ownership, policy roles, high systemic importance, and the track record of capital support for the banks under different governments.
SUBORDINATED DEBT - UKREXIMBANK
Ukreximbank's subordinated debt rating has been affirmed at 'C', the lowest possible issue rating. The two-notch differential between the bank's VR of 'ccc' and the subordinated debt rating of 'C' reflects one notch for incremental non-performance risk (resulting from the flexibility to defer coupons in certain circumstances, for example if the bank reports negative net income for a quarter) and one notch for potentially weaker recoveries due to the instrument's subordination.
VRs, IDRS, NATIONAL RATINGS AND SENIOR DEBT
Both banks' low ratings reflect very high levels of credit risk. The VRs could be downgraded if additional loan impairment recognition further undermines capital positions without sufficient support being provided by the authorities, or if deposit outflows sharply erode the banks' liquidity, in particular in foreign currency. Further stabilisation of the sovereign's credit profile and the country's economic prospects would reduce risks to the ratings.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
The SRs could be upgraded and the SRFs revised upwards if Fitch revises its view of the authorities' ability to provide timely support to the banks, in particular, in foreign currency. However, this is unlikely in the near term, given the country's weak external finances.
|Full company name||Joint Stock Company "State Savings Bank of Ukraine"|
|Country of risk||Ukraine|
|Country of registration||Ukraine|