Scope Ratings said that it has revised down to A- from A the Black Sea Trade and Development Bank’s (BSTDB) long-term issuer and senior unsecured foreign-currency ratings and affirmed its short-term issuer rating of S-1 in foreign currency, while keeping all outlooks negative as the ongoing war in Ukraine takes its toll on the lender's operating environment.
The downgrade was driven by the expected adverse impact from the continuing military conflict on BSTDB's asset quality, Scope said in a statement on Friday.
Russia and Ukraine together account for 32%, or 748 million euro ($822.8 million), of the bank’s outstanding loans, of which the bank has an exposure of 470 million euro to Russia and 279 million euro to Ukraine, Scope explained. In this context, heightened transactional risks in Russia, due to capital controls and sanctions, as well as severe credit quality risks in Ukraine stand out as major reasons for the slip in the bank's rating.
Moreover, the expected increase in provision requirements in the coming years is expected to lead to revisions of the bank’s future earnings growth and absorb a high share of the bank’s reserves, weighing on its capitalisation, Scope said.
The negative outlook reflects the uncertainty regarding the eventual impact from the war on BSTDB's balance sheet, strategy and shareholder relations.
The Greece-headquartered multilateral development bank counts Russia, Turkey and Greece as its top shareholders, each with an equity stake of 16.6%. Romania owns 14.1% of BSTDB, while Bulgaria and Ukraine each own an interest of 13.6%. Azerbaijan, Albania, Armenia, Georgia and Moldova have stakes of 5% or less. No shareholder has a blocking majority.
Loans by the bank more than doubled to 2.1 billion in the first half of 2021 from 1.0 billion in 2015, Scope noted. With capitalisation levels estimated at 35%, or very high compared to its peers, the lender's equity and reserves stood at around 871 million euro in the first half of 2021.
The BSTDB, which supports economic development and regional cooperation in the Black Sea region, has recently expanded its activities and relies on an upcoming capital increase later in 2022 to support additional loan growth, with 245 million euro to be paid in between 2023 and 2030.
"Scope therefore expects that shareholders will provide at least 60 million euro in additional capital during 2023-24, which will help offset the financial impact of the Russia-Ukraine crisis," the agency stated.
Scope added that any delay to the planned capital increase or signs of weakening shareholder commitment to the bank from Russia, the EU and/or NATO member states would be credit-negative. However, financial and political support to the bank enabling it to play a role in post-conflict reconstruction would prove to be credit-positive.
In a commentary on Monday, Scope stressed that no BSTDB shareholder has so far indicated it intends to leave the bank and that the lender is seen to benefit from preferred creditor status.
"The continued support and preferential treatment of all its shareholder governments, including Russia, where about 20% of the bank’s loans are disbursed, remain critical for the bank’s credit rating," Scope concluded.
Last week, BSTDB announced that Standard & Poor’s Global Ratings (S&PGR) lowered its long- and short- term foreign and local currency issuer credit ratings on BSTDB to A-/A-2 from A/A-1, with a negative outlook.
Earlier last month, Moody's also downgraded the bank's long-term issuer rating, to Baa1 from A2.