Fitch Ratings-London/Moscow-23 September 2009: Fitch Ratings has today downgraded the Individual ratings of three foreign-owned Ukrainian banks - UkrSibbank, Ukrsotsbank and Forum - to ‘E’ from ‘D/E’, reflecting ongoing asset quality deterioration. At the same time, the agency has affirmed the Individual ratings of three other foreign-owned Ukrainian banks - ProCredit Ukraine at ‘D/E’ and Pravex and VTB Ukraine at ‘E’.

The agency has also affirmed the foreign currency Long-term Issuer Default Ratings (IDRs) of all six banks at ‘B’ with a Negative Outlook, reflecting the potential for support from the banks’ foreign shareholders. A full list of rating actions is provided at the end of this commentary.

Fitch’s rating actions took into account the significant deterioration in asset quality metrics during H109 following the large depreciation of the UAH in Q408 and the sharp economic downturn, and the potential for further increases in loan impairments. Fitch notes, in particular, the high share of foreign currency loans (59% at Pravex; 80%-85% at the other five banks) and significant exposure to the retail segment (with the exceptions of ProCredit Ukraine and VTB Ukraine) as among the factors driving growth in NPLs (loans overdue by more than 90 days) and/or restructured and extended loans in H109. Pressure on capital remains considerable, and even following recently completed and planned capital injections, loan loss absorption capacity will remain limited, likely requiring further recapitalisation support from shareholders at most of the banks. Liquidity/refinancing risks are less of a concern given the significant funding facilities available from parent banks.

The banks’ Long-term IDRs and National Long-term ratings are underpinned by potential support from their shareholders, in case of need. However, Ukrainian transfer and convertibility risks, as reflected in the Country Ceiling ('B'), could limit the extent to which these banks can utilise this support. UkrSibbank is almost 81%-owned by France's BNP Paribas ('AA'/Negative); Ukrsotsbank is almost 95%-owned by Italy-based UniCredit S.p.A. ('A'/Negative) through its Vienna subsidiary UniCredit Bank Austria AG (‘A’/Stable); Forum is majority-owned (63%) by Germany’s Commerzbank AG ('A+'/Stable); ProCredit Ukraine is 80%-owned by Germany's ProCredit Holding AG ('BBB-'/Stable); Pravex is 100%-owned by Italy's Intesa Sanpaolo S.p.A. ('AA-'/Stable) and VTB Ukraine is more than 99%-owned by Russia's JSC Bank VTB ('BBB'/Negative).

Reported NPLs and restructured/extended loans at UkrSibbank amounted to 16% and 10% of gross loans, respectively, at end-H109. The regulatory capital ratio stood at 13.2% at end-August 2009 and the loan impairment reserve (LIR)/gross loans ratio at 11.6%, indicating only moderate loss absorption capacity. A subordinated loan of up to USD100m expected from the EBRD in H209-Q110 will provide some support to UkrSibbank’s regulatory capital ratio; however, equity contributions may also be required in future in light of asset quality problems. Highly liquid assets (defined as cash, balances with the National Bank of Ukraine (NBU) net of obligatory reserves, net short-term interbank assets and unpledged securities eligible for refinancing with NBU) covered a comfortable 28% of client funds at end-H109 while external refinancing needs were insignificant to end-H110; parent funding represented 41% of end-H109 liabilities.

Ukrsotsbank’s reported NPLs increased to 18.5% of gross loans at end-H109 and restructured/extended loans to 10.4%, while the LIR/gross loans ratio was a moderate 7.9% in the end-H109 IFRS accounts. Current capitalisation (regulatory capital adequacy ratio of 14.5% at mid-September 2009) offers only limited loss absorption capacity. After the recent UAH500m capital contribution and a USD100m subordinated loan received from the EBRD in August 2009, there are no immediate capital-raising plans, although in light of the significant pressure from growing loan impairments, more capital support could be required. Reliance on parent funding remains significant (53% of end-H109 liabilities); however, repayments of foreign borrowings other than those from the parent bank are moderate (equal to 8% of end-H109 liabilities) to end-H110.

Forum’s reported NPLs stood at 21.7% of gross loans at end-H109. Loan impairment coverage was only 54% of NPLs at end-H109 and the regulatory capital ratio of 15.9% at end-August 2009 therefore offers limited loss absorption capacity. Capitalisation has been supported mainly by frequent equity injections from the bank’s shareholders, and in July 2009 Tier 2 capital was also enhanced by a USD80m subordinated loan from EBRD. Majority shareholders are considering injecting a further UAH1.1bn of capital by the end of 2009. Funding materially relies on the parent bank, with Commerzbank providing around 45% of non-equity funding at end-H109.

ProCredit Ukraine reported NPLs at 8% of gross loans at end-H109 and restructured loans of 25%. However, Fitch has affirmed the bank’s ‘D/E’ Individual rating in light of the reasonable performance of the restructured portfolio to date, the bank’s limited exposure to more high-risk sectors (construction and retail) and reasonable (by Ukrainian market standards) risk management. ProCredit Ukraine's capital ratios improved in H109 (reported regulatory capital ratio of 14.1% at end-H109), after an equity injection of USD10m; however, Fitch still views capitalisation as tight, in view of pressure on asset quality from the challenging operating environment and the potential for further UAH depreciation. ProCredit Ukraine is 20% owned by the European Bank for Reconstruction and Development, and Kreditanstalt fuer Wiederaufbau is expected to take a stake of at least 20% in H209 through the purchase of existing shares from ProCredit Holding and contribution of new equity.

Pravex’s NPLs and restructured/extended loans were both substantial at end-H109, with the regulatory capital ratio (18.4% at end-H109) and LIR/gross loans ratio of 10% offering only limited loss absorption capacity. An equity injection equivalent to EUR50m is planned for Q409; however, Pravex may need additional capital support, in particular in case of further asset quality deterioration and/or significant UAH devaluation. Large arrears also pose challenges to stand-alone liquidity management. However, the liquidity profile benefits from relatively stable customer deposits (up 6% in H109) and parent funding (26% of total liabilities at end-H109). Highly liquid assets covered a comfortable 31% of customer funds at end-H109 and there are no significant wholesale refinancing needs to end-H110.
VTB Ukraine reported NPLs and restructured loans at 15% and 26%, respectively, at end-H109. A highly concentrated loan book (the top 20 groups of related borrowers represented 55% of gross loans) is another source of concern. The regulatory capital ratio increased to 18% at end-H109 following the receipt of a USD129m subordinated loan from VTB in January 2009 and the subsequent USD100m pre-payment of new equity (NBU considers this in capital calculations). However, the reserve coverage of NPLs is rather low under local GAAP, at only 45%, and therefore total loss absorption capacity is limited. Funding is mainly provided by VTB group, which accounted for almost 70% of liabilities.

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.

Fitch will shortly publish research on each of the banks mentioned in this commentary on www.fitchratings.com

The rating actions are as follows:

JSCIB UkrSibbank (UkrSibbank):
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Senior unsecured debt: affirmed at 'B'; Recovery Rating at 'RR4'
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: downgraded to 'E' from 'D/E'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable

Ukrsotsbank:
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Senior unsecured debt: affirmed at 'B'; Recovery Rating at 'RR4'
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: downgraded to 'E' from 'D/E'

Bank Forum (Forum):
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Senior unsecured debt: affirmed at 'B'; Recovery Rating at 'RR4'
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: downgraded to 'E' from 'D/E'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable

ProCredit Bank (Ukraine) (ProCredit Ukraine):
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Local Currency Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: affirmed at 'D/E'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable

Pravex Bank (Pravex):
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: affirmed at 'E'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable

JSC VTB Bank (Ukraine) (VTB Ukraine):
Long-term foreign currency IDR: affirmed at 'B'; Outlook Negative
Long-term local currency IDR: affirmed at 'B+'; Outlook Negative
Short-term IDR: affirmed at 'B'
Support Rating: affirmed at '4'
Individual rating: affirmed at 'E'
National Long-term rating: affirmed at 'AAA(ukr)'; Outlook Stable