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Fitch Affirms Two Privately-Owned Ukrainian Banks

July 16, 2013 | Fitch Ratings

Fitch Ratings has affirmed two privately-owned Ukrainian banks: Pivdennyi Bank (PB) and Industrialbank's (INB) Long-term IDRs at 'B-'. The Outlook on PB is Stable and on INB is Negative. A full list of rating actions is at the end of this comment.
The affirmation of PB's ratings reflects the bank's stable franchise in its home region and reasonable liquidity position. At the same time, the ratings take into account high balance sheet concentrations, asset quality concerns, moderate capitalisation and modest performance.
At end-Q113, the bank reported low (by Ukrainian standards) non-performing loans (NPLs; more 90 days overdue) of 5.6% of total loans, while restructured and rolled-over exposures made up a large 37% of the gross portfolio. In this context, the bank's loss absorption capacity appears modest. Fitch estimates that at end-Q113 the bank was able to increase impairment reserves only up to 18% of gross loans without breaching the minimum regulatory capital level of 10%.
On a consolidated basis, PB's liquidity position is comfortable, given the liquidity cushion held on the balance sheet of the bank's Latvian subsidiary - Regional Investment Bank (RIB): at end-4M13, highly liquid assets (cash and equivalents, net short-term interbank placements and securities eligible for repo financing with Central Banks) accounted for 33% of customer accounts. However, about half of these assets were booked on RIB's balance sheet, and RIB's ability to provide funds directly to the Ukrainian parent at times of stress could be limited by Latvian regulation, although Fitch understands that liquidity may flow indirectly, giving moderate comfort.
Upward pressure on PB's ratings is currently unlikely, but could stem from an improvement in asset quality (particularly, a reduction of restructured/rolled-over exposures), franchise diversification and improvement of the operating environment. If high impairment losses caused a deterioration of capitalisation or a weakening of liquidity, negative rating action may be warranted.
The Negative Outlook on INB's rating reflects Fitch's view of further potential franchise deterioration following changes in the ownership of the bank's formerly related party Zaporozhstal (ZS; large Ukrainian steel producer) in 2012, as a significant part of INB's business was generated by ZS and its servicing companies. The decrease in pre-impairment profitability to UAH2m in 2012 (adjusted for non-recurring gains on a property sale) from UAH75m in 2011, a fall in the net interest margin to 6.9% from 8.7% and the outflow of ZS-funds all in part reflect franchise deterioration, in the agency's view.
Fitch is also concerned about the quality of INB's economic capital position. The regulatory capital ratio of 22.4% at end-Q113 looks solid, but is undermined by the high volume of related party lending (equal to about 71% of IFRS equity at end-2012), only partially (for 23%) collateralised by related-party deposits. Restructured/rolled-over exposures were also a large 42% of the loan book at end-Q113. Fitch notes potential downside risks stemming from these categories as recovery prospects are uncertain, while there is also limited transparency with respect to the purpose of related-party lending and the quality of these exposures.
Prolonged deterioration in performance, recognition of substantial impairment losses or tightening of the liquidity position could warrant negative rating action. The Outlook could be revised to Stable if the bank's efforts to diversify franchise result in better performance, a decrease in related party lending and stabilisation of asset quality.
The rating actions are as follows:

Pivdennyi Bank
Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'

Long-term IDR: affirmed at 'B-'; Outlook Negative
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
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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