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Moody's affirms Bank Finance and Credit's ratings

June 29, 2014

Moody's Investors Service has today affirmed Bank

Finance and Credit's Caa3 long-term global local currency deposit rating,

and the Ca long-term global foreign-currency deposit rating with a

negative outlook. At the same time, Moody's affirmed Bank Finance and

Credit's standalone bank financial strength rating (BFSR) of E, which is

now equivalent to a baseline credit assessment (BCA) of caa3 (formerly

ca). The rating agency also affirmed the bank's Not-Prime short-term

local- and foreign-currency deposit ratings and National Scale

Rating (NSR). The bank's BFSR and the NSR carries no specific outlook.

Moody's affirmation of Bank Finance and Credit's ratings is primarily

based on the bank's audited financial statements for 2013, prepared under



Moody's says that the realignment of Bank Finance and Credit's BCA to

caa3 from ca reflects the fact that the bank currently meets all

obligations to local and international creditors and depositors following

conclusion of the Eurobond restructuring in January 2014. At the same

time, the affirmation of the bank's global scale ratings along with a

negative outlook reflects (1) its volatile funding and liquidity profile;

(2) low capital flexibility, which is currently suppressed by high

related-party and single-name concentrations; and (3) weak recurring

profitability and efficiency metrics. The rating agency notes that the

bank's credit profile faces challenges from negative credit conditions in

Ukraine, characterised by sharp GDP contraction and local-currency

depreciation, which are likely to result in new credit losses that erode

already weak capital and profitability metrics.

Moody's views the terms of the Eurobond restructuring conducted by the

bank, which aims to extend maturity from 2014 to 2019, as a

distress-exchange, resulting in losses for bondholders. Bank Finance and

Credit concluded the transaction in January 2014, and the bank now has no

refinancing risks until the renegotiated maturity in 2019. However, the

bank's funding profile is vulnerable to local depositors' confidence.

Against the background of social and political tensions and a near 30%

local currency depreciation, the bank lost around 5% of its deposits in

Q1 2014. The outflow was compensated by liquidity lines from the

regulator - National Bank of Ukraine (NBU), which represented around 20%

of the bank's non-equity funding as of 1 April 2014.

Bank Finance and Credit's capital profile was historically weak. With the

total regulatory capital adequacy ratio as low as 11% (compared with

system aggregate of 18.3%) as of 1 January 2014, the bank allocated

around 420% of its Tier 1 capital to top-20 credit exposures, which, in

Moody's view, are mainly represented by related borrowers. Moody's

expects the bank's asset quality to deteriorate in 2014, thus exposing

the bank to the risks of severe capital depletion.

The rating agency believes that Bank Finance and Credit's business model

lacks efficiency. The bank has limited opportunities to reallocate

funding costs to affiliate borrowers, therefore it reported a low 1.2%

net interest margin in 2013 (compared with 4.5% sector average). In

addition, the necessity to maintain a deposit-collection branch network

prompts high operating expenses, resulting in a cost-to-income ratio of

around 100% in 2013. The bank displays weak internal capital generation

and will not be able to absorb expected credit losses without external

capital support.

Moody's notes that Bank Finance and Credit's core shareholder -- Mr.

Konstantin Zhevago -- committed to inject UAH1.3 billion ($110 million)

in 2014, and in Q1 2014, the bank received a UAH500 million injection of

Tier 1 capital. The shareholder's commitment to support the bank is one

of the core factors supporting the ratings.

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Source: EMBIN (Emerging Markets Business Information News)

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