Fitch Ratings on July 19, 2012, affirmed the Long-term foreign currency Issuer Default Ratings (IDRs) of Public Joint Stock Company UkrSibbank, Ukrsotsbank (Ukrsots) and PJSC VTB Bank (Ukraine) (VTBU) at 'B' with stable outlooks, and their Viability Ratings at 'ccc'.
As Fitch said in a statement, the three banks’ IDRs, Support and National Ratings are driven by the likelihood of support they may receive from their majority shareholders. UkrSibbank is 85%-owned by France’s BNP Paribas (‘A+’/Stable); Ukrsotsbank is 95%-owned by Italy-based UniCredit S.p.A. (‘A-‘/Negative) through its Vienna subsidiary UniCredit Bank Austria AG (‘A’/Stable); and VTB Ukraine is more than 99%-owned by Russia’s JSC Bank VTB (‘BBB’/Stable). The Country Ceiling of Ukraine (‘B’), which reflects Fitch’s view of transfer and convertibility risks, constrains the banks’ Long-term foreign currency IDRs as it limits the extent to which support from their majority foreign shareholders of these banks can be factored into the ratings. Their ‘B+’ Long-term local currency IDRs also take into account Ukrainian country risks.
Fitch says the banks’ Long-term IDRs could be upgraded or downgraded if Ukraine’s sovereign ratings and Country Ceiling were upgraded or downgraded. In addition, for each bank, Fitch will take into account the propensity of the shareholders to continue operations in Ukraine, which could affect the probability of support that is factored into the ratings.
The VRs of all three banks continue to reflect their weak standalone profiles and high dependence on timely capital support and funding (Ukrsots and VTBU) from their respective parents. While asset quality has stabilized for each of the banks, a large volume of restructured exposures remain, whose recoverability is likely to be a lengthy process, and will probably require recognition of additional impairment charges. At the same time, the potential for balance sheet growth and earnings generation is constrained by the still weak macroeconomic picture and periodic shortages of local currency liquidity.
Liquid assets are predominantly kept in foreign currencies and government securities, while access to local currency could be expensive or dependent on the propensity of the National Bank of Ukraine (NBU) to provide secured refinancing. Currency devaluation risks also constrain the standalone credit strength of the banks in light of still significant proportion of foreign currency lending (50%-70%) for all three banks, and to a varying degree to short economic open currency positions.
Fitch says the VRs could be upgraded if there were significant improvements in asset quality, a return to sustainable profit generation and building up of stronger capital buffers. The VRs could be downgraded if there was additional loan impairment recognition which further undermines capital positions.
Ukrsots’ NPLs (loans overdue by 90 days or more) accounted for a large 45% of the loan book at end-2011 and restructured exposures for an additional 20%. The latter included a high portion of loans from construction/real estate sector, while the bank’s total exposure to this segment was a high 72% of Fitch core capital at end-2011, heightening the bank’s risk profile. Reserve coverage of NPLs remained low at only 40% at end-2011 and only 24% for total NPLs and restructured exposures. The regulatory capital adequacy ratio was 12.6% at end-Q112, meaning that the bank could increase impairment reserves up to 25% only of the loan portfolio before breaching the 10% required minimum CAR. This is a modest degree of loss absorption given the extent of loan impairment, while the quality of pre-impairment profit (4% of average gross loans in 2011) and consequently the bank’s capital, was also undermined by the large share of unpaid interest accruals (23% of interest income or 15% of Fitch core capital in 2011). However, Ukrsots is currently in the process of a capital increase which should have a minor positive effect on its capital buffer.
UkrSibbank has progressed with its balance sheet clean-up during the past year, including the sale of problem assets to third parties and to parent-funded special purpose entities. Remaining NPLs (around 18% of portfolio in local accounts) are prudently covered by impairment reserves (by 90%). However, the restructured loans (almost 30% of the portfolio) additionally accounted for 1.3x-1.6x of its regulatory capital. The quality of capital was also constrained by significant deferred tax assets (40% and 55% of the bank’s regulatory and Basel Tier 1 capital respectively), which could be partly or fully derecognized if there were adverse changes in profitability forecasts or regulatory treatment. Internal capital generation was undermined by weak operating efficiency, with the bank’s cost/income ratio hovering above 90%. The open economic foreign currency position was equal to almost 50% of UkrSibbank’s equity, exposing the bank to risks in case of UAH devaluation.
VTBU’s regulatory capital adequacy ratio is tight (11.5% at end-H112), although impairment reserves covered recognized NPLs by 1.8x. However, the reserves were still insufficient to cover potential problems in the restructured portfolio, with the net unreserved exposure accounting for 2.6x regulatory Tier 1 capital. The vulnerability of the capital position is exacerbated by significant concentrations in VTBU’s corporate loan book, the majority of the top 20 exposures (equivalent of 4.5x equity) being in the restructured portfolio. Significant risks also arise from VTBU’s short economic open currency position (equal to 1.1x its equity at end-H112), although the bank plans to reduce this through available market instruments. Reliance on parent funding remains significant, accounting for about half of total liabilities.
The rating actions are as follows:
Public Joint Stock Company UkrSibbank:
– Long-term foreign currency IDR: affirmed at ‘B’; Outlook Stable;
– Long-term local currency IDR: affirmed at ‘B+’; Outlook Stable;
– Short-term foreign currency IDR: affirmed at ‘B’;
– Support Rating: affirmed at ‘4’;
– Viability Rating: affirmed at ‘ccc’;
– National Long-term rating: affirmed at ‘AAA(ukr)’; Outlook Stable;
– Senior unsecured local currency debt: affirmed at ‘B+’/’AAA(ukr); Recovery Rating ‘RR4’.
Ukrsotsbank:
– Long-term foreign currency IDR: affirmed at ‘B’; Outlook Stable;
– Long-term local currency IDR: affirmed at ‘B+’; Outlook Stable;
– Short-term foreign currency IDR: affirmed at ‘B’;
– Support Rating: affirmed at ‘4’;
– Viability Rating: affirmed at ‘ccc’;
– National Long-term rating: affirmed at ‘AAA(ukr)’; Outlook Stable.
PJSC VTB Bank (Ukraine):
– Long-term foreign currency IDR: affirmed at ‘B’; Outlook Stable;
– Long-term local currency IDR: affirmed at ‘B+’; Outlook Stable;
– Short-term foreign currency IDR: affirmed at ‘B’;
– Support Rating: affirmed at ‘4’;
– Viability Rating: affirmed at ‘ccc’;
– National Long-term rating: affirmed at ‘AAA(ukr)’; Outlook Stable;
– Senior unsecured local currency debt: affirmed at ‘B+’/’AAA(ukr); Recovery Rating ‘RR4’.
