Fitch Ratings has affirmed the Long-Term Foreign Currency Issuer Default Ratings (IDRs) of PJSC Credit Agricole Bank (CAB), ProCredit Bank (Ukraine) (PCBU), PJSC Pravex-Bank (Pravex), PJSC Alfa-Bank (ABU) and Ukrsotsbank (Ukrsots) at 'B-' with stable outlooks, reads a posting on the rating agency's website.

"Fitch has also upgraded the Viability Ratings (VRs) of CAB to 'B' from 'B-', PCBU to 'B-' from 'CCC', Pravex to 'B-' from 'CC' and Ukrsots to 'CCC' from 'CC'. ABU's VR has been affirmed at 'CCC'," according to the document.

"All five banks' IDRs and National Ratings factor in the likelihood of support they may receive from their foreign shareholders. The affirmations of CAB's, PCBU's and Pravex's 'B-' Long-Term Foreign Currency IDRs reflect the constraint of Ukraine's Country Ceiling of 'B-', which captures transfer and convertibility risks and limits the extent to which support from the majority foreign shareholders of these banks can be factored into the ratings. The stable outlooks on the Long-Term Foreign Currency IDRs of CAB and PCBU are in line with that on the Ukrainian sovereign. The revision of the outlook on Pravex's Long-Term Foreign Currency IDR to stable from negative reflects Fitch's view that the rating at this level is now also underpinned by the bank's VR, following its upgrade to 'B-' from 'Cc'," the agency experts said.

"The Long-Term Local Currency IDRs of CAB, PCBU and Pravex at 'B' also take into account country risks. The stable outlooks on the Long-Term Local Currency IDRs of CAB and PCBU reflect Fitch's view of the likely evolution of these risks. The negative outlook on Pravex's Long-Term Local Currency IDR reflects the potential for the bank to be sold and hence for potential shareholder support to be reduced, in which case this rating would likely be downgraded to the level of the bank's VR," they stated.

"CAB is fully owned by Credit Agricole S.A. (A+/Stable). PCBU is controlled (94% of voting stock) by Germany's ProCredit Holding AG & Co. KGaA (BBB/Stable). Pravex is fully owned by Intesa Sanpaolo (BBB/Stable), but has been managed as a non-core asset from 2014 when it was put up for sale," Fitch said.

"The affirmation of ABU's and Ukrsots' Long-Term IDRs, National Ratings and ABU's senior debt ratings reflects Fitch's unchanged view of the potential support both banks may receive from other assets of Alfa Group. However, the probability of support is limited due to the banks' indirect relationship with other group assets and the mixed track record of support (for ABU) from the shareholders," the rating states.

"ABU and Ukrsots are both ultimately owned by ABH Holdings S.A. (ABHH), which is part of Alfa Group's financial business and is the owner of several other banking subsidiaries, mostly in the CIS, including Russia-based OJSC Alfa-Bank (BB+/Stable). In October 2016, Ukrsots' former owner, UniCredit S.p.A. (UniCredit, BBB/Stable), transferred its 99.9% share in Ukrsots to ABHH in exchange for 9.9% of ABHH's shares," the document says.

"The upgrades of CAB's, PCBU's, Pravex's and Ukrsots' VRs reflect reduced pressures on asset quality mostly due to the more stable Ukrainian economy, the banks' modest growth/deleveraging (except for PCBU) and generally moderate risk appetites since the downturn in Ukraine's economy in 2014. The VR upgrades also consider improved loss absorption capacity following recent bank recapitalizations (Pravex, Ukrsots, PCBU) and/or continued resilience in operating performance (CAB, PCBU) that allowed for stronger coverage of problem assets and more comfortable capital cushions," the agency added.

"The VRs of all five banks remain constrained by the challenging operating environment and/or still large stocks of legacy impaired loans (in particular at Pravex, Ukrsots and ABU), which pressure performance. We do not expect material improvements in asset quality metrics in the near term as Ukraine's economic recovery is only moderate; Fitch expects GDP growth of 2% in 2017 and 3% in 2018," the experts stated.

"The VRs of all five banks also reflect stabilization of funding profiles, driven by decreased hryvnia volatility, and comfortable liquidity cushions accumulated in a period of low credit growth. Non-deposit funding is limited at these banks," they said.

"CAB's 'B' VR reflects the bank's stronger standalone creditworthiness than peers'. It is supported by the bank's more balanced business model, benefitting from access to cheap (by market standards) and stable client funding, and a focus on lower-risk lending segments (multinational clients, better performing agro producers, car loans in retail) resulting in more resilient financial metrics," Fitch said.

"CAB's non-performing loans (NPLs, loans more than 90 days overdue) stood at 14.5% of loans at end-2016, and performing restructured loans were at 10.5% (end-2015: 15% and 12%, respectively). Impaired loans (NPLs plus restructured) were comfortably (74%) covered by impairment reserves; however, the unreserved portion of these amounted to a significant 50% of Fitch Core Capital (FCC). Loss absorption capacity is underpinned by solid pre-impairment profitability (equal to 10% of average gross loans for 2016), and a capital buffer is also available to absorb additional credit losses (FCC ratio of 12.7%). CAB reported a solid 36% return on average equity (ROAE) in 2016 (2015: 27%)," the report says.

"PCBU's 'B-' VR factors in the risks associated with a largely unseasoned loan book following the bank's rapid growth in the core SME segment (by 52% in 2016 and 32% in 2015, adjusted for FX effects). Loans, however, have been originated under reasonably strict underwriting criteria with limited inflows of new problem loans to date," it states.

"PCBU's NPLs and restructured (classified as standard, watch-list and impaired) loans stood at 2.9% and 7.6%, respectively, at end-2016, down from 5.6% and 14.4% at end-2015. Impairment reserves provided moderate (62%) cover for NPLs and restructured loans. The unreserved portion of these moderated to 28% of FCC at end-2016 from 129% at end-2015 following an equity injection in 2016, which also caused the FCC ratio to increase to 14% from 7.3%. Loss absorption capacity is underpinned by reasonable pre-impairment profitability (equal to 6% of average loans in 2016), net of unpaid accruals and non-core revenues. PCBU reported a solid 33% ROAE in 2016 (2015: 18%)," the agency said.

"Pravex's 'B-' VR reflects progress in the clean-up of the bank's balance sheet. NPLs decreased to 25% of loans at end-Q1, 2017 from 72% at end-2015 after write-offs, and the remaining NPLs were fully covered by specific reserves. Restructured loans were a moderate 6% of loans at end-2016 (or 18% of FCC) and weakly provisioned. Apart from loans (a low 18% of the balance sheet at end-Q1, 2017), other assets were of moderate- to low risk, and mostly liquid assets (cash and equivalents and short-term investments into National Bank of Ukraine securities) which were equal to around 86% of customer deposits," it stated.

"Pravex's solid capital buffer (FCC ratio of 22% at end-2016) should be seen in the context of the bank's still weak operational performance (annualized pre-impairment loss amounted to 18% of FCC in Q1, 2017), constrained by a low share of high-earning assets and a still sizable cost base," it reads.

"ABU's and Ukrsots' 'CCC' VRs factor in both banks' high levels of NPLs (end-2016: ABU: 35% of loans, 74%-covered by reserves; Ukrsots: 75% and 82%, respectively) and restructured loans (ABU: 33%; Ukrsots: 15%). The unreserved portions of these problem exposures were high at both banks (ABU: 5x FCC; Ukrsots: 2x FCC) and the FCC ratio was low at ABU (7.9%), but stronger at Ukrsots (25.2%) supported by the equity contribution provided by UniCredit before the bank's sale in 2016. ABU also expects to receive moderate capital support of $60 million in 2017 (equal to 0.6x FCC or 5% of risk-weighted assets at end-2016)," the experts said.

"Both banks were deeply loss-making in 2016 (ROAE of -170% at ABU and -131% at Ukrsots, which reported pre-impairment losses in 2015-2016), due to a large share of weakly performing assets, low margins on the restructured portfolio (Ukrsots) and high provisioning needs at both banks. Performance prospects will depend on the ability to generate new healthy business (currently less evident for Ukrsots) and avoid new credit losses," the document reads.

"Liquidity is comfortable at both banks and managed jointly suggesting some fungibility between the banks' balance sheets. The buffers of liquid assets (calculated as liquid assets net of near-term wholesale funding repayments) were equal to 17% of customer deposits at ABU and 33% at Ukrsots at end-4M17," the report says.

"The IDRs of CAB, PCBU and Pravex could be upgraded if Ukraine's sovereign ratings are upgraded and the country ceiling revised upwards, and downgraded in case of a sovereign downgrade. An upgrade of ABU's and Ukrsots' IDRs and Support Ratings would require a strengthening of the support track record for both banks," it reads.

"A significant weakening of the ability and/or propensity of shareholders to provide support could also result in downgrades. A sale of Pravex to a weaker investor would result in a downgrade of its support-driven Long-Term Local Currency IDR and National Long-Term Rating," it says.

"The VRs could be downgraded if additional loan impairment recognition undermines capital positions without sufficient support being made available. Upside for banks' VRs is currently limited," Fitch summarized.

The rating actions are as follows:

CAB:

Long-Term Foreign Currency IDR: affirmed at 'B-', outlook stable

Long-Term Local Currency IDR: affirmed at 'B', outlook stable

Short-Term Foreign Currency IDR: affirmed at 'B'

Short-Term Local Currency IDR: affirmed at 'B'

Support Rating: affirmed at '5'

Viability Rating: upgraded to 'b' from 'b-'

National Long-Term Rating: affirmed at 'AAA(ukr)'; outlook stable

ProCredit Bank (Ukraine):

Long-Term Foreign Currency IDR: affirmed at 'B-', outlook stable

Long-Term Local Currency IDR: affirmed at 'B', outlook stable

Short-Term Foreign Currency IDR: affirmed at 'B'

Short-Term Local Currency IDR: affirmed at 'B'

Support Rating: affirmed at '5'

Viability Rating: upgraded to 'b-' from 'ccc'

National Long-Term Rating: affirmed at 'AAA(ukr)'; outlook stable

Pravex-Bank:

Long-Term Foreign Currency IDR: affirmed at 'B-', outlook revised to stable from negative Long-Term Local Currency IDR: affirmed at 'B', outlook negative Short-Term Foreign Currency IDR: affirmed at 'B' Support Rating: affirmed at '5' Viability Rating: upgraded to 'b-' from 'cc' National Long-Term Rating: affirmed at 'AA+(ukr)', outlook negative PJSC Alfa-Bank: Long-Term Foreign Currency IDR: affirmed at 'B-', outlook stable Long-Term Local Currency IDR: affirmed at 'B-', outlook stable Senior unsecured local currency debt: affirmed at 'B-'/'RR4'/, 'AA(ukr)' Senior unsecured local currency market linked securities: affirmed at 'B-(emr)'/'RR4'; 'AA(ukr)(emr)' Short-Term Foreign Currency IDR: affirmed at 'B' Support Rating: affirmed at '5' Viability Rating: affirmed at 'ccc' National Long-Term Rating: affirmed at 'AA(ukr)'; outlook stable Ukrsotsbank: Long-Term Foreign Currency IDR: affirmed at 'B-', outlook stable Long-Term Local Currency IDR: affirmed at 'B-', outlook stable Short-Term Foreign Currency IDR: affirmed at 'B' Support Rating: affirmed at '5' Viability Rating: upgraded to 'ccc' from 'cc' National Long-Term Rating: affirmed at 'AA(ukr)'; outlook stable