Overview
- The Russia-Ukraine conflict, which began three months ago, is likely to last for some time, causing severe fallout for Ukraine's economy and the banking sector.
- In our view, economic and industry risks in the Ukrainian banking system have increased due to the substantial loss of economic activity, resulting in an anticipated problem loan increase.
- We believe that the National Bank of Ukraine will continue to provide liquidity support to the banking sector and Bank Alliance JSC while martial law remains in effect.
- Therefore, we removed our 'CCC/C' long- and short-term issuer credit ratings on Bank Alliance from CreditWatch developing and affirmed them.
- The developing outlook reflects our uncertainty regarding the duration of the war and its effects on the Ukrainian banking system and Bank Alliance.
Rating Action
On May 27, 2022, S&P Global Ratings affirmed its 'CCC/C long- and short-term issuer credit ratings and 'uaCCC+' national scale rating on Bank Alliance JSC. We also removed the ratings from CreditWatch developing, where they were placed on Feb. 28, 2022, and assigned a developing outlook.
Rationale
The affirmation balances our view that economic and industry risks in the Ukrainian banking system have increased against our expectation of the National Bank of Ukraine (NBU)'s continued liquidity support to banks including Bank Alliance. We expect that Bank Alliance's nonperforming loans (NPLs) and cost of risk will materially increase in 2022 in line with the Ukrainian banking system. This year, we expect Ukraine's real GDP to contract about 40% and inflation to exceed 25%. Although many companies in Ukraine substantially reduced their operations or stopped working in the first months of the war others, including the bank's borrowers, continued or recently resumed their operations, showing resilience. Further developments are uncertain and will depend on the location and intensity of military actions. Bank Alliance has introduced credit holidays for individuals and companies affected by the war and restructured over 20% of its loan book. As a result of lost economic activity, its Stage 3 loans increased to over 4% as of April 30, 2022, from about 1% at year-end 2021 and they could rise to up to 20% over the next 12 months, in our view. Provisions accounted for 9.5% of Bank Alliance's total loans at April 30, 2022, and we expect an increase in the cost of risk to double-digits this year.
We expect Bank Alliance's profitability will sharply reduce in 2022, putting additional pressure on its weak capitalization. We expect to see a decline in business volumes, net interest income, and fee and commission income, and a material increase in credit loss provisions in the Ukrainian banking system, as well as at Bank Alliance. The NBU encourages Ukrainian banks to proactively provision problem loans and states that it will not apply corrective measures to banks for failing to meet the capital and liquidity requirements while martial law is in effect. A new minority shareholder plans to inject Ukrainian hryvnia (UAH) 160 million of Tier 1 equity in the bank in 2022, which should partially compensate for an expected decline in capitalization. In addition, the bank received income from the positive revaluation of Ukrainian government bonds in April and May following sharp negative valuations in February and March. These bonds accounted for about 40% of Bank Alliance's assets as of April 30, 2022.
We forecast the bank will maintain adequate liquidity and can also rely on the NBU's support. In the first three months of the war, Bank Alliance proactively managed its liquidity and it was compliant with its regulatory liquidity ratios as of mid-May 2022. During the first three months of the war, about 22% of its deposits were withdrawn, with the most pronounced outflow in the first month and stabilization in May. The bank was able to compensate for these outflows having accumulated a large liquidity cushion prior to the war, through loan repayments, and with the NBU's liquidity support. The NBU committed to providing all Ukrainian banks unlimited unsecured refinancing loans maturing in up to one year, and an option to extend the loans to support liquidity if needed. In addition, Bank Alliance has open credit lines from the European Investment Bank (EIB) and International Finance Corp. and was able to borrow €2 million from EIB since the start of the war.
Outlook
The developing outlook over a six-to-12-month horizon reflects our uncertainty regarding the duration and effects of the war on the Ukrainian banking system and Bank Alliance.
Upside scenario
A positive rating action could follow if:
- We perceive that the risks to Bank Alliance from the war have receded;
- The NBU continues to provide liquidity support to the bank;
- It receives the planned Tier 1 capital injection;
- The bank has sufficient liquidity; and
- Bank Alliance continues to fulfil all its obligations in full and on time.
Downside scenario
We could lower our ratings if we have evidence that Bank Alliance's creditworthiness has weakened due to a material deterioration in its liquidity not compensated by the NBU's, support, or if the bank is not fulfilling its financial obligations in full and on time.
ESG credit indicators: E-2, S-2, G-4
Related Criteria
- Criteria | Financial Institutions | General: Financial Institutions Rating Methodology, Dec. 9, 2021
- Criteria | Financial Institutions | Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Dec. 9, 2021
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- General Criteria: Methodology For National And Regional Scale Credit Ratings, June 25, 2018
- Criteria | Financial Institutions | General: Risk-Adjusted Capital Framework Methodology, July 20, 2017
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct. 1, 2012
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Related Research
- Bank Alliance Downgraded To 'CCC/C'; Put On CreditWatch Developing On Fallout From Russian Military Operation In Ukraine, Feb. 28, 2022
Ratings List
| Ratings Affirmed; Outlook Action | ||
|---|---|---|
| To | From | |
|
JSC Bank Alliance |
||
| Issuer Credit Rating | CCC/Developing/C | CCC/Watch Dev/C |
| Ukraine National Scale | uaCCC+ | uaCCC+/Watch Dev/-- |
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; or Stockholm (46) 8-440-5914
| Primary Credit Analyst: | Annette Ess, CFA, Frankfurt + 49 693 399 9157; annette.ess@spglobal.com |
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