Fitch affirms seven Ukrainian bank IDRs, downgrades viability ratings on sovereign rating actions

MOSCOW. Aug 23 (Interfax) - Fitch Ratings has affirmed Long-Term Foreign-Currency (LTFC) and Local- Currency (LTLC) Issuer Default Ratings (IDRs) assigned to seven Ukrainian banks at 'CCC-' and 'CCC', respectively, the agency said in a press release.

The banks include the state-owned Oschadbank, Ukreximbank, Ukrgasbank, and PrivatBank, as well as First Ukrainian International Bank (FUIB); Alfa-Bank (ABU) and ProCredit Bank (PCBU).

Fitch has also downgraded PrivatBank's Viability Rating (VR) to 'ccc-' from 'ccc' and the six other banks' to 'cc' from 'ccc' to reflect "heightened sovereign and operating environment risks to the banks' standalone credit profiles."

The rating actions follow the downgrade of Ukraine's sovereign rating to 'CC' from 'CCC'.

Fitch said the affirmation of the IDRs at 'CCC-' reflects the banks' "stressed but still generally adequate foreign currency liquidity relative to their needs, helped by various regulatory capital and exchange controls to reduce the risks of deposit and capital outflows and maintain stability and confidence in the banking system."

Banks will "continue to service their external obligations," Fitch said. The banking sector's external debt accounted for just 3% of the sector's total liabilities at end-2021 and is largely concentrated in Oschadbank and Ukreximbank. Their next Eurobond repayments are limited in size, and are due in September 2022 at around $70 million for Oschadbank, and in January 2023 at around $25 million for Ukreximbank.

The LTFC IDRs of Oschadbank, Ukreximbank; Ukrgasbank and Privat are driven by their Government Support Ratings (GSRs) of 'ccc-' and of PCBU by its Shareholder Support Rating (SSR) of 'ccc-'. PCBU's shareholder is ProCredit Holding AG & Co. The GSRs for ABU and FUIB are 'No Support'.

The affirmation of the banks' LTLC IDRs at 'CCC', one notch above their LTFC IDRs, reflects limited regulatory restrictions and constraints on local-currency (LC) operations. The banking sector's LC liquidity management is currently supported by limits on cash withdrawals and a guarantee of all retail deposits. The National Bank of Ukraine is also offering LC liquidity support to banks. These support measures have helped to maintain domestic confidence in the banking system, with hryvnia retail deposits rising about 16% since the end of February.

The VRs "reflect our view of the exceptionally high risks to Ukrainian banks' standalone profiles," Fitch said.

Fitch's base case is that "very high operating-environment risks will lead to a surge in problem loans that will require extensive provisioning, threatening the banks' solvency."

"At a 'cc' VR we believe the failure of the banks is a probable scenario," Fitch said. Privat's higher VR at 'ccc-' "reflects our view of its significantly stronger loss-absorption buffers" than those of the other six banks.

Fitch believes positive rating action is unlikely in the near term.