Moody's downgrades Ukreximbank's Baseline Credit Assessment to ca

KYIV. Dec 8 (Interfax-Ukraine) – Moody’s Investors Service has downgraded state-owned Ukreximbank’s Baseline Credit Assessment (BCA) and Adjusted BCA to ca from caa3, as well as long-term Counterparty Risk Assessment (CR Assessment) to Caa3(cr) from Caa2(cr) and Counterparty Risk Ratings to Caa3 from Caa2.

"Concurrently, Moody’s affirmed the bank’s Caa3 long-term deposit ratings, Caa3 senior unsecured debt rating and Ca subordinated debt rating," the agency’s website said.

Moody’s also said that the outlook on the long-term deposit and senior unsecured debt ratings remains negative.

According to the rating agency, According to the rating agency, the downgrade of Ukreximbank’s BCA to ca was mainly driven by the material deterioration in its capital position, which followed large credit losses and resulted in the breach of its minimum capital requirements. The bank reported regulatory Tier 1 and total capital adequacy ratios of 3.4% and 6.8%, respectively, as of 1 November 2022, below the required minimum of 7% and 10%.

"Unless the bank reverses its loss making performance, any prospect for capital restoration will require recapitalisation by shareholders," Moody’s said.

Moody’s said the affirmation of government-owned Ukreximbank’s Caa3 long-term deposits and senior unsecured debt ratings reflects a one-notch uplift from the bank’s BCA of ca, given a very high probability of support from the government of Ukraine (Caa3, negative); Ukreximbank’s ample liquidity that underpins its capacity to repay maturing liabilities; but also the extremely challenging operating environment.

Ukreximbank’s asset quality has materially deteriorated since February 2022 as Russia’s invasion and subsequent military conflict caused the severe damage of the Ukrainian economy and destroyed the debt-servicing capacity of many of Ukreximbank’s borrowers. As a result, for the first nine months in 2022, Ukreximbank reported net losses of UAH 7.9 billion driven by increased provisioning charges.

Moody’s added that Ukreximbank’s liquid assets accounted for around 50% of total assets as of June 2022, which can support the repayment of around $100m outstanding Eurobonds and around $110m of subordinated debt.

The agency said that in recent years, Ukreximbank has significantly reduced its reliance on market funding, which accounted for around 23% of its tangible assets as of 30 June 2022 and predominantly includes refinancing loans from National Bank of Ukraine (11% of total liabilities), Eurobonds and interbank loans (mainly from international financial organizations – 12% of total liabilities). The bank is therefore mainly deposit-funded.

Moody’s understands that the recent deterioration of Ukreximbank’s capital ratios below the minimum regulatory requirements has not caused a breach of the Eurobond covenants, as the bank obtained a covenant waiver from its bondholders and all major creditors in anticipation of the severe pressure on its assets quality and capital caused by the invasion.

The outlook further captures the agency’s view that a protracted military conflict could further negatively impact Ukraine’s economic conditions, heightening liquidity challenges and asset risks in the banking system and severely disrupting the banks’ operating environment and its ability to meet liabilities as they fall due.

A bank ratings upgrade is not likely over the next 12-18 months, according to the press release.