November 19, 2012 / 1:32 PM / 7 years ago

TEXT-Fitch drops CIBCA's rating; rates Credit Agricole Bank 'B'/stable

(The following statement was released by the rating agency)

Nov 19 - Fitch Ratings has affirmed and withdrawn Ukraine-based PJSC Corporate Investment Bank Credit Agricole’s (CIBCA) ratings, including its Long-term foreign currency Issuer Default Rating (IDR) of ‘B’. At the same time, Fitch has assigned Ukraine-based PJSC Credit Agricole Bank (CAB) a Long-term foreign currency IDR of ‘B’ with a Stable Outlook and a Viability Rating (VR) of ‘b’. A full list of rating actions is at the end of this comment.

RATING ACTION RATIONALE AND DRIVERS

CIBCA’s ratings have been affirmed and withdrawn as the entity no longer exists following its merger into CAB on 19 November 2012.

CAB’s IDRs, National and Support Ratings are underpinned by Fitch’s view of the probability of support from the bank’s ultimate parent, Credit Agricole S.A. (CASA; ‘A+’/Negative). In assessing potential support, Fitch takes into account CASA’s full ownership of CAB, the common branding, considerable management integration, the track record of previous capital and liquidity support, and the relatively small size of the subsidiary. At the same time, Fitch classifies CAB as a subsidiary of ‘limited importance’ to CASA, given that Ukraine is not a target market for the parent and CASA does not have a significant franchise in emerging Europe as a whole.

Ukraine’s Country Ceiling (‘B’), which reflects transfer and convertibility risks, limits the extent to which support from CASA can be factored into CAB’s Long-term foreign currency IDR, while its Long-term local currency IDR of ‘B+’ also takes into account Ukrainian country risks.

CAB’s VR reflects the bank’s solid financial metrics, the low-risk nature of the bank’s business with group clients and Fitch’s base case expectation of only moderate UAH depreciation and a pick-up in economic growth from 2013. At the same time, the VR takes into account the still relatively high-risk operating environment, the history of losses on CAB’s local business and potential cyclicality of future performance, and significant balance-sheet dollarisation.

CAB’s asset quality was superior to most Ukrainian peers, with non-performing loans (NPLs; more than 90 days overdue) accounting for 3.8% of the total combined portfolio at end-Q312, while restructured/extended exposures made up a further 3.5%. Foreign-currency loans represented around 39% of the combined loan book at end-Q312. Fitch estimates that around 30% of the combined loan book was formed by the operations with group clients and such exposures were mostly parent-bank guaranteed.

The bank’s liquidity position was comfortable and a cushion of liquid assets (cash and equivalents and net short-term interbank placements), together with an unused credit line from the parent covered 29% of customer accounts at end-10M12.

Management estimates that the combined bank would have reported a regulatory capital adequacy ratio of 18.6% at end-Q312. Fitch estimates that this would have enabled the bank to increase its loan impairment reserves up to 13% of loans without breaching the minimum 10% regulatory capital requirement, which is comfortable relative to current loan impairment, but moderate given past impairment and the vulnerable macroeconomic environment.

As result of the merger, CAB’s assets increased to approximately UAH12bn from UAH8.3bn at end-Q312. Before the merger, CIBCA had been focusing on servicing large multinational corporates in Ukraine, which are global clients of the parent bank. This business has been highly profitable, and should strengthen CAB’s internal capital generation. Before the merger, CAB focused mainly on servicing local clients, and was loss-making through the crisis.

RATING SENSITIVITIES

The bank’s IDRs and Support Rating are currently constrained by the Country Ceiling and Ukrainian country risks more generally, and any change in these ratings would likely be driven by changes in the sovereign rating. Should CASA decide to exit the Ukrainian market and sell CAB (not anticipated at present), the Support Rating and Long-term local currency IDR could be downgraded.

A significant improvement in the operating environment and marked reduction in country risks, coupled with a favourable performance track record of the merged bank, could create scope for an upgrade of the VR. A marked deterioration in asset quality causing a significant weakening of the bank’s capital position could generate downward pressure on the VR.

The rating actions are as follows:

The following ratings of CIBCA were affirmed and withdrawn:

Long -term foreign currency IDR: ‘B’, Outlook Stable

Long -term local currency IDR: ‘B+’, Outlook Stable

Short-term foreign and local currency IDRs: ‘B’

Support Rating: ‘4’

National Long-term rating: ‘AAA(ukr)’, Outlook Stable

The following ratings have been assigned to CAB:

Long -term foreign currency IDR: ‘B’, Outlook Stable

Long -term local currency IDR: ‘B+’, Outlook Stable

Short-term foreign and local currency IDRs: ‘B’

Support Rating: ‘4’

National Long-term Rating: ‘AAA(ukr)’, Outlook Stable

Viability Rating: assigned ‘b’

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