Fitch upgrades Privatbank to sovereign level after restructuring ends

Fitch Ratings upgraded the long-term foreign currency rating of Privatbank (PRBANK) to CCC, a sovereign level, from RD following the bank’s completion of its Eurobond restructuring, the agency reported on Dec. 4. It also upgraded the bank’s viability rating to ccc. In its decision, Fitch referred to the bank’s successful restructuring of its Eurobonds last month, which will postpone the repayment of USD 350 mln in external debt from early 2016 to 2018-2020. The agency also stressed the bank’s USD 930 mln liquidity, which is “comfortably sufficient” to meet near-term funding maturities. It also likes the bank’s reduced pressure from deposit volatility, availability of liquidity support from the central bank, and Privatbank’s high capital adequacy ratio (over 11% if new subordinated loan accounted for). On the negative side, Fitch listed the bank’s low coverage of NPLs and individually impaired loans (32%), material share of foreign currency lending to unhedged borrowers and weak financial performance. The agency also expects the central bank’s asset quality review and stress testing will likely reveal additional provisioning and recapitalization needs. In view of Fitch analysts, the bank “would be unlikely, in case of default, to be forced into bankruptcy or liquidation procedures and a fire sale of assets.”

Alexander Paraschiy: Privatbank’s dominant position on the Ukrainian market indeed allows us to expect that the bank won’t be liquidated in case something goes wrong. Most likely, in the case of insolvency, the bank will be nationalized. Therefore, we agree with Fitch’s argumentation that the bank’s long-term rating is close to the sovereign one. However, we see more uncertainties for the bank in the short term, which might be reflected in the volatility of its bonds. While we agree that the bank has no liquidity risks, its key challenge is the possible need to further increase its capital, due to low reserve coverage of problem loans and the risk of its loan portfolio deteriorating. Also worrying is the bank’s worsened profitability –  recall, its net interest income plunged 55% yoy in 3Q15 on a significant increase in funding costs.