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
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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
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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
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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.
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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
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