Ukrainian KREDOBANK Ratings Affirmed At `CCC
Transcription
Ukrainian KREDOBANK Ratings Affirmed At `CCC
Research Update: Ukrainian KREDOBANK Ratings Affirmed At 'CCC-' Despite Rising Economic And Sovereign Risks; Outlook Negative Primary Credit Analyst: Olga Kulikovskaia, Milan (39) 02-72111-260; [email protected] Secondary Contact: Annette Ess, CFA, Frankfurt (49) 69-33-999-157; [email protected] Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2015 1 1394795 | 302195758 Research Update: Ukrainian KREDOBANK Ratings Affirmed At 'CCC-' Despite Rising Economic And Sovereign Risks; Outlook Negative Overview • On April 10, 2015, we lowered our long-term foreign currency sovereign credit rating on Ukraine to 'CC' from 'CCC-' on its plan to restructure its Eurobonds, which we would view as tantamount to a default. • A sovereign default could have unpredictable, but severe consequences for KREDOBANK's financial profile, despite ongoing support from its parent, Polish banking group PKO. • In particular, the sovereign could further restrict retail deposit withdrawals for the whole Ukrainian banking sector. PKO has no way to control for this risk and if the sovereign imposes further restrictions we could consider KREDOBANK to have selectively defaulted. • Therefore, we are affirming our long-term foreign and local counterparty credit rating on KREDOBANK at 'CCC-' and our Ukraine national scale rating at 'uaCCC-'. • The negative outlook mirrors that on the sovereign. If we see further tightening of exchange controls in Ukraine, we would likely lower the ratings to 'SD' (selective default). We could also downgrade KREDOBANK if we saw that PKO reduced its willingness to support its subsidiary. Rating Action On April 21, 2015, Standard & Poor's Ratings Services affirmed its long- and short-term counterparty credit ratings on PJSC KREDOBANK (Kredobank) at 'CCC-/C' and our Ukraine national scale rating at 'uaCCC-'. The outlook is negative. Rationale The affirmation factors in the impact on our ratings of the sovereign downgrade on Ukraine (see "Ukraine Long-Term Foreign Currency Rating Lowered To 'CC'; Outlook Remains Negative" published on April 10, 2015), and, more specifically, our view that the Ukrainian government is now extremely likely to restructure its foreign currency commercial debt, which we would see as a default. In particular, the affirmation of the long-term rating at 'CCC-' reflects our view that persistently adverse economic and operating conditions in Ukraine will continue to weigh on Kredobank's financial profile, especially in the case of a sovereign default. However, we consider that ongoing and WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2015 2 1394795 | 302195758 Research Update: Ukrainian KREDOBANK Ratings Affirmed At 'CCC-' Despite Rising Economic And Sovereign Risks; Outlook Negative extraordinary support from Kredobank's 'A-' rated parent, Polish bank PKO, could help the subsidiary to survive a sovereign default. Despite this critical support, there is a risk that the sovereign will further tighten foreign currency exchange controls for retail deposits, especially upon a sovereign default. In such a case, we don't expect PKO to be able to help Kredobank repay its foreign currency deposits on time. Therefore, the outlook is negative and the long-term rating will remain close to the sovereign foreign currency rating. The lowering of our long-term foreign currency rating on Ukraine reflected our expectation that a default on Ukraine's foreign currency central government debt is a virtual certainty. The Ukrainian government has announced its intention to restructure its foreign currency commercial debt (Eurobonds). The government intends to begin discussing debt restructuring with its external commercial creditors soon and to conclude the talks by the end of May. The government's objective is to cover $15.3 billion in external financing needs as part of a revised $40 billion financing plan approved by the International Monetary Fund (IMF). Under our criteria, we expect to classify an exchange offer or similar restructuring of Ukraine's foreign currency debt as tantamount to default. In our view, the extremely high probability of a sovereign debt restructuring is a significant risk for the banking sector as a whole. That said, in our view, continued support from PKO should mitigate the impact, helping Kredobank to survive the expected sovereign default. Assuming a sovereign default, we expect significant liquidity risks stemming from further deposit outflows and we expect Kredobank to increasingly rely on extraordinary parent support to remain liquid. Nevertheless, Kredobank managed to withstand foreign currency retail deposit outflow of about 23% in 2014 and a further outflow of 5.2% in March 2015, resulting from devaluation of the Ukrainian hryvnia (UAH). It achieved this by reducing its leverage, attracting corporate deposits, and relying on liquidity lines provided by the parent. We estimate that PKO provided more than 30% of Kredobank's borrowings at the end of 2014. Moreover, the National Bank of Ukraine could also support Kredobank with local currency liquidity in case of need. We anticipate that Kredobank's already very weak capitalization will come under increasing pressure in 2015. Our stress test scenario assumes a significant haircut on foreign currency-denominated Treasury bills (known as "OVDPs") held by Kredobank and further asset quality deterioration. Under this scenario, we assume that Kredobank will require an additional US$50 million of capital during 2015. Although we don't consider a haircut on Treasury bills to be likely in the short term, we anticipate that PKO has the willingness and capacity to provide capital support if needed and keep the Kredobank solvent. At the same time, in our base-case scenario, we expect that PKO will continue to maintain Kredobank's capitalization at the currently weak levels, increasing Kredobank's Tier 1 capital by about UAH300 million by end-2015. Kredobank has making losses since 2008 and we expect further net losses in WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2015 3 1394795 | 302195758 Research Update: Ukrainian KREDOBANK Ratings Affirmed At 'CCC-' Despite Rising Economic And Sovereign Risks; Outlook Negative both 2014 and 2015, mainly due to very high credit losses that we estimate at about 14% of its credit portfolio for the period 2014-2015. We predict losses despite significant improvement in Kredobank's net interest margins and ongoing parent support. PKO's support has included acquiring UAH372 million in nonperforming loans and providing an emergency subsidy of UAH52.4 million. The risk that Ukraine could further tighten foreign currency exchange controls (implementing controls such as deposit freeze, deposit redenomination, or deposit haircut) would increase upon sovereign default, to avoid massive retail deposit withdrawals at commercial banks. In such a case, despite PKO's support, Kredobank (like its domestic banking peers) would be unable to meet its obligations to retail depositholders on time and in full, because of imposed restrictions. We would likely view this as a selective default. This risk is reflected in our negative outlook and explains why, despite support from a highly rated parent, we continue to view the creditworthiness of Kredobank as very close to, although slightly better, than the Ukrainian sovereign. Outlook The negative outlook on Kredobank reflects that on Ukraine. If we see further tightening of exchange controls and restrictions of retail deposits withdrawals in Ukraine, we would likely lower the ratings to 'SD' (selective default). We could also downgrade Kredobank, if we considered that Kredobank's parent PKO was less willing to support it, contrary to our current expectations. Any positive action would be contingent on the easing of sovereign, economic and industry risks in Ukraine. Ratings Score Snapshot Issuer Credit Rating CCC-/Negative/C SACP* ccc- Support GRE Support Group Support Sovereign Support 0 0 0 0 Additional Factors 0 *We assess the stand-alone credit profile on our "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published on Oct. 1, 2012. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2015 4 1394795 | 302195758 Research Update: Ukrainian KREDOBANK Ratings Affirmed At 'CCC-' Despite Rising Economic And Sovereign Risks; Outlook Negative Related Criteria And Research Related Criteria • National And Regional Scale Credit Ratings, Sept. 22, 2014 • Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 • Group Rating Methodology, Nov. 19, 2013 • Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012 • Banks: Rating Methodology And Assumptions, Nov. 9, 2011 • Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011 • Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related Research • Ukraine Long-Term Foreign Currency Rating Lowered To 'CC'; Outlook Remains Negative, April 10, 2015 • Banking Industry Country Risk Assessment: Ukraine, Sept. 4, 2014 Ratings List Ratings Affirmed PJSC KREDOBANK Counterparty Credit Rating Ukraine National Scale CCC-/Negative/C uaCCC-/--/-- Additional Contact: Financial Institutions Ratings Europe; [email protected] Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. 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