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Rating Action:

Moody's takes rating actions on 9 Ukrainian banks and one leasing company

Global Credit Research - 26 Mar 2015

Actions follow downgrade of Ukraine's government bond rating to Ca

London, 26 March 2015 -- Moody's Investors Service has today taken rating actions on nine Ukrainian banks and one leasing company following the weakening of Ukraine's credit profile, which is reflected in Moody's downgrade on 24 March 2015 of the Ukrainian government bond rating to Ca (negative) from Caa3 (negative). The country's macroeconomic conditions continue to weaken severely, prompting material and sustained volatility in the banks' operating environment. This will continue to exert acute pressure on Ukrainian banks financial fundamentals, and thereby increase the risk of insolvency for many of the country's banks.

Moody's has assigned negative outlooks to all affected banks' ratings.

Specifically, Moody's has:

(1) downgraded the local-currency (LC) deposit ratings of seven banks;

(2) downgraded the foreign-currency (FC) debt ratings of three banks and local-currency (LC) debt rating of one bank;

(3) downgraded the foreign-currency (FC) subordinate debt ratings of two banks;

(4) downgraded the National Scale Ratings (NSRs) of five banks;

(5) affirmed the LC deposit ratings and the NSRs of two banks and one leasing company;

(6) affirmed the FC deposit ratings of nine banks (having been capped previously by the FC bank deposit ceiling of Ca);

(7) downgraded the baseline credit assessments (BCAs) of seven banks.

A list of the affected ratings is available on the following link: https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_180129 This list is an integral part of this Press Release and identifies each affected issuer.

For further information on the sovereign rating action, please refer to Moody's press release: https://www.moodys.com/research/--PR_320764

RATINGS RATIONALE

--- EFFECT OF OPERATING ENVIRONMENT

The continuing, sharp deterioration in the country's macroeconomic conditions, alongside substantial and persistent volatility in operating environment, will continue to exert acute pressure on Ukrainian banks financial fundamentals, increasing the insolvency risk for many banks.

With the economy likely to contract by 5.5% this year, following a retrenchment of 6.9 % in 2014, Moody's expects Ukrainian banks' asset quality and capital positions to erode further this year. Capital buffers have already come under significant pressure. In the absence of additional equity injections from shareholders, capital levels will decline further given the anticipated rise in problem loans. Asset quality pressure is exacerbated by the 40% depreciation of the Ukrainian hryvnia against the US dollar between 1 January and 1 March 2015. This is because around 40% of the bank loans in Ukraine are denominated in FC (mostly in US dollar) and a significant portion the FC borrowers have no export revenues to protect themselves against the impact of a weaker currency on debt servicing costs. The steep rise in the cost of funding due to the National Bank of Ukraine's efforts to stabilise the currency is also weighing heavily on interest margins, contributing to banks' losses. According to the National Bank of Ukraine's recent monthly report, the average regulatory capital adequacy ratio (CAR) for Ukrainian banks fell below the 10% minimum in February, declining thereafter to 7.4% at 1 March 2015 (from 15.6% at year-end 2014), illustrating the urgency of recapitalising Ukraine's fragile banking system.

Ukrainian banks' funding and liquidity profiles are also under intense pressure amid the currency crisis and severe social and political tensions. Banks have weathered the substantial withdrawals to date because the National Bank of Ukraine has provided LC liquidity support and issued some controls on withdrawals from foreign currency deposits .

Moody's considers that Ukrainian banks' large exposure to the domestic debt issued by the national government and related entities is a source of significant risk, although this debt is not included in the Ukrainian government's debt restructuring plan which is expected to cause substantial losses to external private creditors.

--- BANK SPECIFIC FACTORS

-- PRIVATBANK

The downgrade of PrivatBank's LC deposit and FC senior unsecured debt ratings to Ca from Caa3, with a negative outlook, reflects the acute downside pressure on the bank's liquidity and capitalisation. The bank has to repay $200 million of senior unsecured bonds in September 2015. Although these bonds amount to only about 3% of the bank's total assets as of year-end 2014, the restructuring of Ukraine's government debt, coupled with the country's limited access to foreign exchange, may prompt PrivatBank to restructure these obligations as it confronts severe asset quality, capital and liquidity pressures.

The downgrade of the bank's FC subordinated debt rating to C from Ca is driven by the downgrade of the bank's standalone BCA to ca from caa3 and the structural subordination of these instruments which points to higher severity of losses than for senior debt in a default scenario.

The bank's FC deposit rating is affirmed at Ca, having been constrained previously at that level by the country's FC deposit ceiling of Ca.

-- SAVINGS BANK OF UKRAINE

Moody's downgrade of state-owned Savings Bank of Ukraine's long-term LC deposit and FC debt ratings to Ca from Caa3, with a negative outlook, reflects (1) the likelihood of external creditors incurring significant losses from the anticipated restructuring of the bank's outstanding Eurobonds (maturing in March 2016) as these instruments are included in the government's debt restructuring plan; (2) the high inter-linkage between the bank's standalone credit fundamentals and sovereign creditworthiness given the bank's high direct exposure to sovereign debt and bonds guaranteed by the state (over 122% of the bank's Tier 1 capital as of 1 July 2014), and (3) the impact of highly adverse economic conditions in Ukraine on the bank's asset quality, capital adequacy and liquidity position. Moody's also notes that the bank's gross exposure to state-owned financially-stressed Naftogaz is significant, equal to about 82% of its Tier 1 capital as of mid-2014, while on a net of provision basis the exposure amounts to 67% of the bank's Tier 1capital.

The bank's FC deposit rating is affirmed at Ca, having been constrained previously at that level by the country's FC deposit ceiling of Ca.

-- UKREXIMBANK

Moody's downgrade of state-owned Ukreximbank's long-term LC deposit and FC debt ratings to Ca from Caa3, with a negative outlook, reflects (1) the likelihood of external creditors incurring significant losses from anticipated restructuring of the bank's outstanding Eurobonds (maturing in April 2015) as these instruments are included in the government's debt restructuring plan; (2) the high inter-linkages between the bank's standalone credit fundamentals and sovereign creditworthiness given the bank's high direct exposure to sovereign debt (over 270% of the bank's equity as of 1 January 2015); and (3) the impact of the highly adverse operating environment on the bank's asset quality and capital adequacy.

The downgrade of the bank's FC subordinated debt rating to C from Ca is driven by the lowering of the bank's standalone BCA to ca from caa3 and the structural subordination of these instruments which points to higher severity of losses than for senior debt in a restructuring scenario.

The bank's FC deposit rating is affirmed at Ca, having been constrained previously at that level by the country's FC deposit ceiling of Ca.

-- OTP BANK ( Ukraine)

The downgrade of OTP Bank's (Ukraine) LC deposit rating to Caa2 from Caa1, with a negative outlook, reflects Moody's view that the bank's financial fundamentals are highly vulnerable to the country's increasingly adverse operating environment. Specifically, the bank's capital buffers are very low (with total regulatory CAR of 10.4% at year-end 2014) and it has a large exposure to loans denominated in FC (around 60% of its loan book at year-end 2014), in addition to holding a big portfolio of loans that originated in the eastern regions directly affected by the military conflict.

The downgrade of the bank's BCA to ca from caa3 reflects Moody's expectation that the bank will have to rely on extraordinary parental support and that in the absence of this support the bank's capital buffer will not be sufficient to absorb expected credit losses. The bank's Caa2 LC deposit rating benefits from two notches of uplift from its BCA because of Moody's assessment of a high probability of support from its parent, OTP Bank Nyrt (deposit Ba2 negative, BCA ba2), in case of need.

The bank's FC deposit rating is affirmed at Ca, being capped at that level by the country's FC deposit ceiling of Ca.

-- PROMINVESTBANK

The downgrade of Prominvestbank's LC deposit rating to Caa3 from Caa2, with a negative outlook, reflects heightened risks related to the bank's very high exposure to loans denominated in FC (over 70% of its loan book as at year-end 2014) along with a substantial holding of loans originated in eastern regions that are directly affected by the military conflict. These factors will continue to exert significant pressure on the bank's asset quality and capital.

The downgrade of the bank's BCA to ca from caa3 reflects Moody's expectation that the bank will remain highly reliant on the extraordinary support of its parent Vnesheconombank (Ba1 negative) and that in the absence of this support the bank's capital buffer will not be sufficient to absorb expected credit losses (despite the recent capital increase). The bank's Caa3 LC deposit rating benefits from one notch of uplift from its BCA due to Moody's assessment of moderate probability of parental support from Vnesheconombank , in case of need. This rating action concludes the review for downgrade initiated on 17 March 2015.

The bank's FC deposit rating is affirmed at Ca, being capped at that level by the country's FC deposit ceiling of Ca.

-- SUBSIDIARY BANK SBERBANK OF RUSSIA

The downgrade of Subsidiary Bank Sberbank of Russia's LC deposit rating to Caa2 from Caa1, with a negative outlook, reflects Moody's expectation that the bank's asset quality and capital will remain under severe pressure because of (1) increased risks related to the bank's very high exposure to loans denominated in FC (over 80% of its loan book as at year-end 2014); and (2) its substantial exposure to loans originated in the eastern regions directly affected by the military conflict.

The downgrade of the bank's BCA to ca from caa3 reflects Moody's expectation that the bank will have to rely on the extraordinary support of its parent Sberbank (deposit Ba2 / senior unsecured Ba1 negative, BCA ba2) and that in the absence of this support the bank's capital buffer will not be sufficient to absorb expected credit losses. The bank's Caa2 LC deposit rating benefits from two notches of uplift from its BCA, owing to Moody's assessment of a high probability of parental support from Sberbank, in case of need. This rating action concludes the review for downgrade initiated on 17 March 2015.

The bank's FC deposit rating is affirmed at Ca, being capped at that level by the country's FC deposit ceiling of Ca.

-- BANK FINANCE AND CREDIT JSC

The downgrade of Bank Finance and Credit's LC deposit rating to Ca from Caa3, with a negative outlook, reflects its very weak liquidity position and capital profile in the face of limited funding opportunities, significant refinancing needs and acute pressure on asset-quality. Moody's expects that Bank Finance and Credit's liquidity profile will become increasingly dependent on liquidity support from National bank of Ukraine. The bank will face an increased risk of default and insolvency if liquidity support from the National bank of Ukraine is not maintained and capital injection from its shareholders is not forthcoming. This rating action concludes the review for downgrade initiated on 17 March 2015.

The bank's FC deposit rating is affirmed at Ca, having been constrained previously at that level by the country's FC deposit ceiling of Ca.

-- RAIFFEISEN BANK AVAL

Moody's decision to affirm Raiffeisen Bank's Aval long-term LC deposit rating of Caa2 with a negative outlook reflects the bank's more moderate exposure to FX loans, sufficient loss-absorption capacity and better liquidity and funding profile than its Ukrainian peers. Those features will assist the bank in containing the magnitude of the anticipated negative pressure on its financial fundamentals.

In addition, the rating agency is not expecting the bank to increase its reliance on capital and liquidity support from its parent. The bank's Caa2 LC deposit rating benefits from one notch of uplift from its BCA of caa3, owing to Moody's assessment of moderate probability of support, in case of need, from its parent, Raiffeisen Bank International AG (deposits Baa2 / senior unsecured Baa2 both on review direction uncertain, BCA ba3).

The bank's FC deposit rating is affirmed at Ca, being capped by the country's FC deposit ceiling of Ca.

-- RAIFFEISEN LEASING AVAL

Raiffeisen Leasing Aval is controlled by Raiffeisen Bank Aval and is fully integrated with its parent. The affirmation of the company's B3.ua NSR is driven by the affirmation of the ratings of Raiffeisen Bank Aval.

-- PIVDENNYI BANK, JSCB

Moody's affirmed Pivdennyi Bank's LC debt and deposit ratings at (P)Caa3/Caa3 level. The affirmation reflects (1) the bank's limited exposure to Ukrainian government debt securities, which on a net basis accounted for 1.6% of total assets (13% of equity) as of year-end 2014 under local GAAP; (2) the significance of its cross-border operations through a subsidiary bank in Latvia, which accounts for 35%-40% of the Group's assets, thereby reducing the adverse effects of the highly adverse macro conditions prevailing in Ukraine; (3) asset-quality indicators that are better than those of its Ukrainian peers, with NPLs (90 days overdue) accounting for 8.6% of gross loans and total impaired loans at around 17% of the loan book as of Q3 2014; and (4) limited wholesale debt repayments and an ample liquidity cushion (at around 35% of assets under consolidated IFRS), mainly kept at the Latvian subsidiary bank or other non-resident correspondent banks.

The bank's FC deposit rating is affirmed at Ca, being capped at that level by the country's FC deposit ceiling of Ca.

WHAT COULD MOVE THE RATINGS UP/DOWN

Moody's considers that upward pressure on the ratings of all 10 Ukrainian financial institutions is unlikely in the near term given the country's highly adverse operating environment. Moody's also notes that many bank ratings are now positioned at the level of the country's foreign and local currency debt and deposit ceilings. These ceilings cap the maximum ratings that can be assigned to banks and other issuers domiciled in the country.

Moody's could downgrade the banks' ratings in the event of default, if solvency risks were to rise even further, or if the country ceilings for Ukraine were to be lowered further.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

The principal methodology used in these ratings was Banks published in March 2015. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Rated entities Privatbank and Prominvestbank or related third parties did not participate in the rating process. Moody's was not provided, for purposes of the rating, access to books, records and other relevant internal documents of the rated entity or related third party.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Malyukova
Analyst
Financial Institutions Group
Moody's Interfax Rating Agency
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves J Lemay
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's takes rating actions on 9 Ukrainian banks and one leasing company
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