Fitch affirms Ukrainian Alfa-Bank at 'B-', outlook stable
Fitch Ratings has affirmed Ukraine-based PJSC Alfa-Bank's (ABU's) Long-term Issuer Default Rating (IDR) at 'B-' with a Stable Outlook and Viability Rating (VR) at 'ccc', reads an agency report.
"ABU's IDRs incorporate Fitch's view on potential support the bank may receive from other assets controlled by its main shareholders, including from its sister bank, Russia-based OJSC Alfa-Bank (AB; 'BBB-'/Stable), which also holds a minority 19.9% stake in ABU. The support considerations factor in the shareholders' intention to broaden the banking franchise in Ukraine, the track record of capital injections, albeit on a limited scale, and the common brand and board members with AB. At the same time, the extent to which support is factored into the ratings is limited by ABU's indirect relationships with companies controlled by ABU's shareholders, the relatively independent operations of the Ukrainian bank and the fact that shareholder support was insufficient to prevent a restructuring of the bank's debt in 2009," said the agency.
"ABU's VR reflects the bank's quite modest capitalization and high dependence on timely capital support from its parent, which is similar to other rated foreign-owned Ukrainian banks. The Fitch core capital (FCC) ratio was a low 4.3% at end-2011, and no immediate equity injections are expected," according to the report.
"Profit generation is low due to the still difficult operating environment, although ABU has managed to improve its margins from retail lending growth and repayment of expensive eurobond funding. The previously targeted break-even was not achieved in 2011 due to significant overshooting in credit impairment charges. However, this helped to improve the ratio of impairment reserves to non-performing loans to a more comfortable 93% at the end of 2011. While pressure on asset quality has eased, notable downside risks remain from the substantial stock of restructured loans, which Fitch estimates to be at least $400 million, equivalent to 16% gross loans at the end of 2011 or 3.4x FCC," the agency stated.
"ABU has managed liquidity tightly, and after successful redemption of the final $105 million eurobond tranche in late July 2012, the liquidity cushion shrank to $80 million, equal to about 5% of customer accounts. Additional liquidity options are limited, represented by $50 million government securities eligible for refinancing with the National Bank of Ukraine (NBU) and a $40 million unused credit line from AB. Access to local currency liquidity is difficult and expensive due to periodic market turbulence, and ABU remains reliant largely on less stable sources of local currency funding, including short-term interbank swaps and REPO operations with the NBU," reads the statement.
"Currency devaluation risks also constrain the standalone credit strength of the bank in light of the still high proportion of foreign currency lending (48%) and significant short economic open currency position. The latter was $250 million at the end of July 2012 (equal to 1.25x equity), and ABU intended to reduce this to $150 million through available market instruments. The remaining unhedged position is kept to fund ABU's high-margin retail portfolio, while losses from potential currency devaluation may be compensated by conversion of $116 million subordinated debt into equity. Additionally, up to $50 million may be available as equity injection from the shareholders.
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