Fitch confirms state bank senior bond ratings at B/Positive

Fitch Ratings affirmed long-term issuer default
ratings for state-run Oschadbank (OSCHAD) and Ukreximbank (EXIMUK) at B with a
Positive outlook, the rating agency reported on Oct. 13. It also affirmed the
rating of the banks’ senior Eurobonds at B with a Positive outlook, and
upgraded the rating of Ukreximbank’s 2023 subordinated notes to CCC from CCC-.

Fitch sees a high propensity of the government to
provide support for the two banks if they need it, taking into account their
100% state ownership and their systemic importance.

Fitch also upgraded the Viability Rating of
Ukreximbank to b- (from ccc+) due to the recent improvement of its P&L, its
lower “encumbrance of equity by net impaired loans” and reduction of “exposure
to market risk.” The Viability Rating of Oschadbank was confirmed at b-.

The rating agency is ready to further upgrade the
banks’ ratings following a Ukraine sovereign rating upgrade. It can lower Ukreximbank’s
ratings if its amount of net impaired loans grows to 1.5x of Fitch Core Capital
(from the end-June value of 0.9x). Oschadbank’s rating could be downgraded if
its Fitch Core Capital ratio drops below 10% (from 14% as of end-June).

Alexander Paraschiy: While
Ukreximbank has demonstrated a good improvement in operating results in 1H21
(net interest income increased 3.7x yoy to UAH 1.88 bln, net profit reached UAH
1.10 bln vs net loss of UAH 1.91 bln a year ago, operating cash flow before
change in assets/liabilities reached UAH 1.05 bln vs negative value of UAH 0.65
bln a year ago), there is no certainty that the bank will keep its positive
bottom line in the future. Nevertheless, we agree with Fitch that the bank’s
fundamentals look better now, so we agree with the rating agency’s assessment
of lowered risks for the bank.

Meanwhile, we see changes of Ukraine’s sovereign
rating as the only possible trigger for changes in the state banks’ ratings. We
continue to believe the banks’ bonds should be traded in line with sovereign
bonds as they have similar risk and potentially a better recovery rate in case
of adverse events.