Ukraine Markets Daily (April 27, 2017)

Market news

  • S&P raises Privatbank’s counterparty rating to CCC+

Market comment

The UX index decreased by 2.4% Yesterday and the PFTS index decreased by 0.6% (in UAH terms). The WIG-Ukraine index increased by 2.2%. On the interbank exchange market, the USD/UAH decreased by 0.1% to UAH 26.56 (mid price), according to Thomson Reuters. The official exchange rate reported by the NBU was UAH 26.63


S&P raises Privatbank’s counterparty rating to CCC+

On April 26, 2017, S&P upgraded Privatbank’s long- and short-term counterparty credit ratings to CCC+/C from SD/SD, outlook stable, according to a statement of the rating agency. The rating upgrade became conceivable after the risk of bankruptcy of the bank receded, as soon as the investors and depositors of the banks are unlikely to launch a bankruptcy lawsuit after the bail-in of the LPN notes and the capitalization of the deposits of related parties in December 2016 during the nationalization of the bank, according to S&P estimations. S&P considers that Privatbank emerged from default, having resumed debt servicing after a short break in December-January in connection with the ownership transition, and is now current on its obligations. S&P estimates the rating outlook to be stable in the next twelve months as default risk is reduced, while the bank still enjoys ongoing support from the state. However, the rating agency notes that the current operating model of the bank may not be viable, considering that nearly 80% of the bank’s corporate lending portfolio consists with non-performing loans, while the bank mostly relies on the highly volatile retail deposit environment to support lending. The rating agency notes that the share of problem loans in the bank is still high, whereas its capitalization and profitability are low, making Privatbank’s ability to meet its financial obligations vulnerable to the fluctuations in the business, financial and economic conditions. Moreover, some risks for the medium-term creditworthiness of the bank remains in connection with the bail-in operations, as some of the bailed-in depositors have initiated litigations in international courts. The bank’s capital adequacy ratio stood at 6.4% (against an NBU requirement of no less than 10%) by mid-April 2017, S&P notes, referring to an asset quality review of the bank conducted by Ernst & Young. The rating agency cautions that additional provisioning expenses, together with high level of expenses on deposits and administrative expenses may put a drag on the bank’s profitability in 2017.

Our view:

The rating upgrade is NEGATIVE for note holders, which are seen to have to accept the losses incurred through the bailing operations on the bank’s Eurobonds and related parties deposits in December 2016. Moreover, despite a return to regular business operations, the sustainability of the bank remains questionable, excluding neither a change in the stance of the Government on the issue, nor a reaffirmation of the bank’s commitments on the debt in the short-to-medium term.