Risky business. At the moment of declaration of insolvency, one third of Ukrainian banks had an investment rating

Photo: Konstantin Melnitskiy

Since the start of 2014 the National Bank of Ukraine introduced provisional administration of 28 commercial banks. At that, nine of them – a third – had an investment credit rating when they were declared insolvent.

Overstated expectations

For instance, at the moment of introduction of the provisional administration at VAB Bank on November 21 its credit rating was at the level of uaBBB- and only in the morning of that day it was lowered to uaBB-. The rating evaluation of the bank’s credit risks was conducted by the Expert Rating agency. Before November 11 the rating of VAB Bank was even higher at uaA-, which seems illogical taking into account the number of negative statements of its clients, messages about its problems in mass media and statements of the central bank about the substantial capital increase of the financial institution.

Representatives of Expert Rating say they were guided by the promises of the NBU to support solvency of the bank owned by Oleh Bakhmatyuk and also expected capital increase of the financial institution by UAH 7 bn promised by its shareholders. Later, however, Bakhmatyuk admitted that he would not be able to find the required amount that the bank needed and said he appealed to the Cabinet of Ministers to inject UAH 4 bn into VAB’s authorized capital. At the same time, after the NBU declared the bank insolvent, it informed that the financial institution does not fall under the criteria of nationalization. “Since the NBU made a decision based on confidential criteria and criteria of the IMF, the question of acquiring a stake in the bank by the state was quite uncertain for the public and the rating agency, which is why the bank’s ratings were being monitored. The rating agency, however, did not have the moral right to lower the ratings of the bank that could potentially come under the ownership of the state. That is why the rating agency refrained from any actions for the period of the negotiations,” explained Leading Financial Analyst at Expert Rating Vitaliy Shapran.

The situation was also similar with Brokbiznesbank, for which Expert Rating maintained a uaAA rating up until the introduction of provisional administration on March 3. Shapran says that one of the reasons was that in February the bank provided statistics for the rating agency, which indicated that all prudential standards of the bank were much higher than the average indicators in the banking system. For example, the capital adequacy of the bank was 47.66% at the average of 18.26% at that moment. Taking this into account the agency did not presume a high probability of default.

The publicly announced promise of the NBU that it would refinance the bank, which was only partially fulfilled, also supported the high rating of Brokbiznesbank, according to Shapran. “After the change of the NBU leadership (Stepan Kubiv was appointed NBU Governor – Capital), the central bank declared Brokbiznesbank insolvent instead of granting it refinancing. The situation with such a sudden change of the position of the central bank to support the bank is clear – the political elite in the country changes and political risks are realized, something that nobody can predict, particularly in light of the events of the past 12 months,” says Shapran.

They came voluntarily

Similar breakdowns can be found in the work of practically all rating agencies operating in Ukraine. For instance, prior to the introduction of provisional administration the Ukrainian Credit Rating Agency (UCRA) maintained a high rating (uaBBB) of Forum and Pivdenkombank. The rating agency Rurik maintained the rating of Real Bank at the level of uaBBB up until introduction of the provisional administration in the bank.

Director of Business Development at Rurik Leonid Dolynskiy explains that the financial institution had no problems in the past during the previous government. “We even improved its rating as the bank’s indicators were on the rise, including client portfolio, deposits and loans. The growth was accompanied by the increase of authorized capital. At that, the growth of these indicators was balanced,” he said. The change of the political elites posed the biggest problem for the bank. “Nobody could predict that the previous government would pack up their bags and flee due to the revolution,” he added.

The Rurik rating agency also maintained the investment rating (uaBBB) of Melior Bank and Intercreditbank up until the moment the financial institutions were declared insolvent. Dolynskiy explains that the banks were not experiencing financial difficulties, while the rating agency could not possibly have known about their involvement in the money laundering schemes that the NBU accused them of. “At the moment of introduction of the provisional administration these two banks had substantial balances in their cash registers and on current accounts. The rating agency does not have the competence to check the origin of this money,” said Dolynskiy.

IBI-Rating provided a similar explanation concerning Green Bank. The reason that the bank was pushed out of the market is not linked to its financial performance. “We have no way of predicting such actions of the regulator,” says the agency’s director Hryhoriy Pererva. The situation with the rating of Axioma Bank made by Credit Rating is similar. “The provisional administration was introduced based on the violations of the law on financial monitoring,” emphasized Deputy General Director of Credit Rating Olha Shubina.

Disastrous verdict

Such inconsistencies of ratings primarily affect legal entities that are the clients of banks. Insurance companies and non-government pension funds must look at the rating before placing funds. They can place them only in financial institutions that have an investment rating of uaBBB and higher. Over the past months around UAH 900 mn of the money of insurance companies were left in banks that were declared insolvent, informed President of the League of Insurance Organizations of Ukraine Oleksandr Zalyotov. This amount does not include the funds of the MTIBU, which lost around UAH 260 mn in Brokbiznesbank. “Today, the rating agencies are not accountable for their operations,” says Zalyotov. “If the rating agencies cannot predict the problems of a bank, then question is why push insurance companies into those financial institutions, when nobody is responsible for the reliability of their ratings.”