Standard & Poor’s Ratings Services has assigned its ‘B-‘ long-term and its ‘C’ short-term counterparty credit and certificate of deposit ratings to Ukraine-based PrivatBank. The outlook is stable. These are the first ratings assigned to a Ukrainian bank by Standard & Poor’s.
“The ratings on PrivatBank reflect its marginal capitalisation and high asset risks stemming from rapid loan growth within the risky Ukrainian economic environment,” says Standard & Poor’s credit analyst Irina Penkina. “These factors are partially offset, however, by the bank’s promising business prospects, increasingly widespread customer deposit base, and positive trend in operating revenues.”
PrivatBank is a leading commercial bank in Ukraine, which, at June 30, 2003, generated 14% of the country’s retail deposits and 29% of loans to individuals. PrivatBank aims to increase its market share in mass retail and SME segments, and is well positioned to do so, based on its wide network and established reputation. The bank will face increasing pricing competition, however.
At mid-2003, the bank’s core capitalisation – its adjusted common equity-to-assets ratio – stood at 4.7%, which is marginal, and scarcely adequate to protect the bank against possible losses.
The credit quality of PrivatBank’s assets is constrained by high economic risks in Ukraine. On a positive note, the loan portfolio is diversified, and single-party credit concentration is relatively low and is not centred on those industries and borrowers subject to political risks. Retail loans comprised 21% of the gross portfolio as of mid-year 2003, and individual loans under US$200,000 made up 48% of the total.
Earnings are driven by the gradual improvement in net interest income and commissions. The share of market-sensitive sources is expected to remain under 15% of operating revenues going forward. Operating efficiency remains modest, due primarily to investments in distribution channels and countrywide expansion, and net profit is constrained by high credit-loss provisions and tax expenses.
“The stable outlook reflects Standard & Poor’s expectations that the bank will increase the scope of its operations in strategic business areas, while avoiding any significant deterioration in capital leverage or loan quality,” says Penkina. Improvements in capital adequacy, supported by higher recurring profitability, may have positive implications for the ratings and outlook on the bank. A significant weakening in core capitalisation ratios would have negative ratings implications.