October 31, 2017 / 5:01 PM / in a year

Fitch Upgrades Privat to 'B-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 31 (Fitch) Fitch Ratings has upgraded the Long-Term Foreign Currency Issuer Default Rating (IDR) of PJSC CB PrivatBank (Privat) to 'B-' from 'RD' (Restricted Default). The Outlook on the Long-Term IDR is Stable. Fitch has also upgraded the bank's Viability Rating (VR) to 'b-' from 'f'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, VR, NATIONAL RATING The upgrade of the Long-Term Foreign Currency IDR reflects the upgrade of Privat's VR to 'b-' from 'f'. The upgrade of the Long-Term Local Currency IDR to 'B-' from 'CCC' is also driven by the upgrade of the VR. The Local Currency IDR, which had been on Rating Watch Evolving (RWE), was not downgraded to 'RD' prior to the upgrade, as Fitch understands there has been no bail-in of third-party local currency obligations of the bank. The upgrade of Privat's National Long-Term Rating to 'AA-(ukr)' from 'BB(ukr)' reflects the upgrade of the IDRs. The National rating is one notch lower than that of two other Fitch-rated state-owned Ukrainian banks, Oschadbank and Ukreximbank, which are each also rated 'B-/Stable', as Fitch views both Privat's stand-alone credit profile and the reliability of government support as somewhat weaker than for the two peers. The upgrade of Privat's VR reflects the stabilisation of the bank's credit profile following rehabilitation procedures implemented by the authorities after its nationalisation, reduced refinancing risks after the bail-in of senior unsecured debt and improved liquidity position. However, the VR also factors in the bank's modest capitalisation, even after the completion of the remaining rehabilitation procedures planned in 4Q17, and weak pre-impairment profitability. Net loans fell to a low 19% of total assets at end-1H17 from over 70% at end-3Q16 as a result of large loan loss provisions created after nationalisation. Other assets were mostly government securities, mainly received as capital injection since December 2016 (47% of assets), cash and placements with western banks (14%), and foreclosed real estate (9%). Holdings of state securities were equivalent to approximately 3.3x of Fitch Core Capital (FCC) at end-7M17. Non-performing loans (NPLs) comprised 88% of gross loans at end-1H17 and largely included a stock of legacy exposures issued to parties related to the former shareholders of the bank. These were 91% covered by specific reserves and the bank targets increasing coverage closer to 100% by end-2017. Foreclosed real estate, net of reserves, should decrease to about 25% of forecast end-2017 FCC after further provisioning of these assets in 4Q17. Other loans (64% of net loans, 12% of assets) largely comprised retail credit card exposures. Vintages suggest decent performance of recent credit card generations. Therefore, we do not expect significant inflow of losses from this portfolio; coverage of retail NPLs by specific reserves was a high 91% at end-1H17. Privat's regulatory total capital adequacy ratio (CAR) was 15.9% at end-7M17 after capital injection totalling UAH150 billion (equal to 60% of end-7M17 assets). An additional planned equity injection of UAH16 billion in November 2017 should enable the CAR to stay slightly above the minimum 10% level after the bank creates additional provisions of UAH29 billion on NPLs and foreclosed real estate in 4Q17. Potential risks to capital may arise from litigation claims of the bailed-in senior creditors of the bank, which held USD390 million of debt, equal to about 45% of forecast end-2017 FCC. Cash-based recurring pre-impairment operating profitability (ie net of unpaid accruals and FX revaluation result) was weak in 1H17 (equal to about 0.4% of assets) after being negative in 2016. The pre-impairment operating result is expected to remain weak in 2H17 and 2018 due to the high cost of funding and the high share of relatively low-yielding securities, while new lending is limited. It will take the bank time to originate higher-yielding assets (loans) and reduce deposit rates, which are necessary steps to achieve a reasonable level of profitability. Privat is hedged from devaluation risks, although exposed to hryvnia appreciation, as its regulatory open currency position (OCP) is long (150% of capital at end-7M17) given the treatment of dollar-linked sovereign bonds as USD exposures. However, the bank reports a large short OCP in IFRS accounts (over 300% of capital) as these sovereign bonds are treated as Ukrainian hryvnia assets in IFRS. Privat is predominantly customer-funded. Deposits accounted for 91% of liabilities at end-1H17, with 80% of these coming from retail customers. Retail deposits are largely foreign currency-denominated and short-term (up to one year), and may show volatility during times of stress. About 6% of funding is represented by UAH-denominated stabilisation loan from the National Bank of Ukraine (NBU). External funding is now just 1% of liabilities (after the debt bail-in) and comprises credit facilities from foreign banks. Liquidity in foreign currency (about USD0.8 billion at end-July 2017) has improved as a result of the gradual purchase of FX on the market, and provides reasonable coverage of the bank's FX-retail funding (USD3.5 billion). Stabilised deposit trends and limited external repayments lower immediate risks to FX liquidity. Liquidity in local currency is underpinned by a large volume of government bonds, which the bank may sell or refinance with the NBU. SUPPORT RATING AND SUPPORT RATING FLOOR The support rating of '5' and Support Rating Floor of 'B-' reflects Fitch's view that the authorities will likely have a high propensity to support the bank given the state ownership, particularly in local currency. Privat is 100% owned by the government of Ukraine through the Ministry of Finance. The view on support also reflects Privat's systemic importance, given its 36% market share in retail deposits, the large capital support made available by the government post-nationalisation and the limited non-deposit liabilities remaining at the bank. The ability to provide support to the bank in case of need, in particular in foreign currency, is viewed as limited given the sovereign's 'B-' Long-Term Foreign-Currency IDR, and the country's still weak external finances. Fitch views the state ownership of Privat as non-strategic given that it arose from rescue, rather than policy objectives. However, we believe the potential full or partial privatisation of the bank is unlikely to happen in the near term. RATING SENSITIVITIES The bank's IDRs, VR, SRF would likely all be downgraded in case of a downgrade of the sovereign rating. However, an upgrade of the sovereign would not automatically result in an upgrade of either the bank's VR or the SRF (the latter given the sovereign's non-strategic ownership) and therefore may not impact the IDRs. An upgrade of the bank's VR would require both a sovereign upgrade and a strengthening of the bank's performance and capital. The VR could be downgraded in the case of a sovereign downgrade, the recognition of further asset impairment not adequately offset by capital support from the authorities, or deposit outflows that sharply erode the bank's liquidity, in particular in foreign currency. The rating actions are as follows: Long-Term Foreign Currency IDR: upgraded to 'B-' from 'RD', Outlook Stable Long-Term Local Currency IDR: upgraded to 'B-' from 'CCC', Outlook Stable, off RWE Short-Term Foreign Currency IDR: upgraded to 'B' from 'RD' Viability Rating: upgraded to 'b-' from 'f' Support Rating: affirmed at '5' Support Rating Floor: revised to 'B-' from' NF' National Long-Term Rating upgraded to 'AA-(ukr)' from 'BB(ukr)', outlook Stable, off RWE. Contact: Primary Analyst Alexander Danilov Senior Director +7 495 956 2408 Fitch Ratings Moscow Valovaya str., 26 Moscow Secondary Analyst Anna Erachina Associate Director +7 495 956 7063 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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