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Fitch Rating Rationale on Affirmation of Industrialbank’s Ratings

January 29, 2009 | "Fitch Ratings"

Fitch Ratings-London/Moscow-29 January 2009: Fitch Ratings comments today on the 26 January 2009 affirmation of the ratings of Ukraine's Industrialbank (Industrial); the Outlook on the bank’s Long-term Issuer Default Rating (IDR) is Negative. The rating affirmation formed part of a more general review of Ukrainian bank ratings, which took into account the heightened liquidity and asset quality risks and greater pressure on capital which Ukrainian banks have faced due to the sharp depreciation of the UAH in Q408, as well as the weaker outlook for the Ukrainian economy. A full list of Industrial’s ratings is provided at the end of this commentary.

Industrial, like other Ukrainian banks, experienced significant deposit outflow in Q408 and is likely to face asset quality deterioration in light of the tougher operating environment, the high proportion of foreign currency lending and the depressed nature of the steel industry, which is key to the bank’s home region. Furthermore, the bank’s weak corporate governance and the low transparency of its shareholder structure, which makes it difficult to assess the true level of related-party business, are negatives for the bank’s credit profile. However, Fitch believes these risks are at present captured by the bank’s Long-term IDR of ‘B-’ (B minus) and reflected in the Negative Outlook. Industrial’s ratings are supported by its still acceptable liquidity and capital positions, moderate reported loan impairment to date and the bank’s slower growth rates (compared to the sector) in 2007-2008.

Fitch estimates that the total loss of client funding (net of FX effects) was 17% during Q408, peaking in October at 11%, but more stable thereafter. Highly liquid assets (including cash; placements with the National Bank of Ukraine (NBU) net of the obligatory reserves; and net short-term (less than one month) interbank placements) were equal to a sizable 34% of total client funds or nearly 77% of the client accounts having contractual maturities up to one month at mid-January 2009. This, however, should be viewed in light of the short-term and concentrated funding profile. The liquidity position was also supported by term collateralised borrowings from the NBU in Q408 (which, however, accounted for below 4% of liabilities at mid-January, 2009). External debt refinancing requirements in 2009 are moderate at 10% of end-2008 liabilities.

Loan growth was 10% in 9M08 (23% in 2007), significantly below the sector average pace of growth, and was negative in Q408 (net of FX effects). Lending remained highly concentrated with exposure to the largest 20 borrowers at 64% of loans and 269% of equity at end-Q308. Reported related-party exposure was below 1% of loans or 3% of equity at end-2008, although Fitch believes the actual figure could be higher. Reported loans overdue by more than 90 days (NPLs) were low at 0.9% of end-Q308 loans. However, loans overdue by one day or more stood at 7.2% of loans at the same date, and NPLs are expected to grow markedly as a result of the sharp depreciation of the UAH during Q408 (around 66% of Industrial’s lending was in foreign currencies at end-2008, including to unhedged borrowers). The loan impairment reserve provided substantial 5.8x-coverage of existing reported NPLs at end-Q308, and grew to represent 7.0% of gross loans at end-2008 (end-Q308: 5.2%). This, together with equity, provides some cushion to absorb a rise in credit losses. The regulatory total capital ratio was 14.1% at the beginning of January, 2009, up slightly from 12.5% at end-Q308 as reported internal capital generation and a switch towards lower-weighted liquid assets offset the effect of the sharp UAH depreciation.

A downgrade of Industrial’s ratings could result from a substantial weakening of asset quality, a marked increase in related party business or renewed rapid deposit outflow. A stabilisation of the macroeconomic environment and maintenance of moderate loan impairment levels could reduce downward pressure on the ratings.

At end-Q308, Industrialbank was the 33rd largest bank by assets in Ukraine. It operates in Zaporizhia, south-east Ukraine, one of the country’s key industrial regions. It is ultimately controlled by several businessmen which are connected to the local steel plant, Zaporizhstal, which is a significant domestic producer and major exporter. Industrialbank remains primarily a corporate bank.

Rating actions on Industrialbank’s ratings are as follows:
Long-term IDR: affirmed at 'B-' (B minus); Outlook Negative
Short-term IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Company: Industrialbank

Full company namePJSC "Industrialbank"
Country of riskUkraine


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