ending in Ukraine. The NBU is also considering imposing a ban on providing foreign currency loans to individuals and corporates that do not have revenues in foreign currencies. Before the financial crisis, loans in foreign currencies accounted for around 60% of Ukrainian banks¡¯ total loan book (see Exhibit 1). The bulk of these loans have been provided to borrowers that neither had foreign currency revenues nor hedged their foreign exchange risk on such loans. The sharp depreciation of the Ukrainian currency by approximately 60% at the end of 2008 has left many of these borrowers, particularly individuals, unable to pay their loans back. This was one of the main drivers behind a steep deterioration of asset quality in Ukraine, with problem loans equalling around 40% of total loans as of year-end 2010 and significantly eroding banks¡¯ capitalisation and profitability. EXHIBIT 1
Rate F Szh rsearchin Rate C Szh re Payment csearch Rate esearchd Lenders n Lenders searchfsearchU Lenders r Lenders i Szh isearchn Payment Bns Payment 0 Mortgage 0% Lendersmortgagepayments 50%search4 Mortgage %30 Payment 0 Mortgage 0 Mortgage Payment %2 Szh 0 Lendersmortgagepayments Mortgage 00search Lenders 0search6 Szh 2 Payment 0 Rate 08 Szh 2 Lenders 0 Lendersmortgagepayments Rate 01search
Source: National Bank of Ukraine
Currently, the share of foreign currency lending in Ukraine remains high (see Exhibit 2) as most of these loans were originated before the financial crisis. In our view, re-imposed restrictions on foreign currency lending by NBU would be credit positive for the Ukrainian banking system because it will help banks minimise their foreign currency and credit risks and protect borrowers from increased debt burden in case of significant depreciation of local currency.
20
Share of Foreign Currency Loans
MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS EXHIBIT 2
Credit Implications of recent worldwide news events
Share of Foreign Currency Lending of Large Ukrainian Banks (Year-End 2010) OTP Bank (Ukraine) Ukrsibbank Ukrsotsbank VTB Bank Bank Nadra Raiffeisen Bank Aval Forum bank First Ukrainian International Bank Ukreximbank Alfa-Bank (Ukraine) Prominvestbank Source: National Bank of Ukraine
81% 80% 79% 74% 65% 65% 61% 56% 52% 43% 42%
John Tofarides Analyst +97.14.237.9543 john.tofarides@moodys.com Khalid Howladar Vice President - Senior Credit Officer +97.14.237.9542 khalid.howladar@moodys.com
UAE¡¯s New Retail Banking Regulations are Credit Negative for Local Banks On 23 February, the central bank of the United Arab Emirates (UAE) issued new regulations for bank loans and other services offered to individual customers (Circular 29/2011) that are aimed at increasing transparency and imposing uniformity in bank fees and tighter controls on retail loans. The circular covers the whole spectrum of retail banking (personal loans, car loans, credit cards, and overdraft facilities) and applies equally to both conventional and Islamic banks. These regulations, which are likely a result of widespread consumer dissatisfaction with high fees and ¡°hidden¡± costs, are credit negative for UAE banks, as they will hurt their profitability by deterring banks from lending to certain retail segments. For UAE banks, net fees and commissions represent around 33% of their pre-provision income. Although banks do not split these fees into retail and corporate categories, we estimate that at least half of those fees are derived from loans to individuals, despite the fact that, on average, loans to individuals represent 29% of total gross loans. The exhibit below shows details of the percentage of loans to individuals to total loans per rated bank in the UAE. Only three banks have significantly higher than 30% of loans to individuals: Abu Dhabi Islamic Bank, National Bank of Ras Al-Khaimah, and First Gulf Bank. Abu Dhabi Commercial Bank and Commercial Bank of Dubai are marginally above 30%.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Loans to Individuals As Percent of All Loans 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2008 2009 ADCB ADIB CBD DB DIB ENBD FGB MB NBAD RAKBANK NBQ UAB UNB
Source: Banks¡¯ annual reports.
The new regulations incorporate new rules on retail lending. Personal loans are now capped at 20 times a borrower¡¯s monthly salary and loan terms are limited to 48 months. Car loans will be limited to 80% of the value of the financed vehicle, compared with the general practice of 90%. Credit cards will only be issued to people with annual incomes higher than AED60,000 ($16,304), versus no minimum currently. Aggregate monthly installments for all loans, (housing, car and personal loans and credit cards) must not exceed 50 percent of a customer¡¯s gross salary and any other regular income (e.g., income for self-employed customers). It is difficult to see how this regulation will be implemented in the UAE without the creation of a federal credit bureau that will be the repository of all credit related information. The larger banks in the UAE, especially in wealthier Abu Dhabi (i.e., National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, and First Gulf Bank), mainly focus on affluent retail customers and already have imposed some of the regulations the central bank is imposing, particularly the minimum salary requirement for credit card loans. In contrast, banks in Dubai and the Northern Emirates as well as financing companies, which are also covered by this new regulation, tend to focus on both affluent and lower income consumer segments that typically fall short of the minimum AED60,000 annual income threshold. Implementation of the circular depends on the central bank¡¯s Banking Supervision and Examination Department issuing detailed guidelines. We expect the new guidelines to shed more light on the implementation of the policies. Currently, retail banking represents around 25% of total earnings at UAE banks, but is much more profitable than corporate banking. While improving lending prudence, these measures come at a time of stagnant recovery, where low loan growth year on year was just 2.4% in 2009 and 1.3% in 2010. Provisioning levels are also high, with the ratio of loan-loss provision expense to gross loans at 2.1% in 2009 and 1.4% in 2010. As such, these new regulations on retail lending will further pressure the profitability of local banks.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Insurers & Asset Managers Steve Zaharuk Senior Vice President +1.212.553.1634 stephen.zaharuk@moodys.com
Premium Reviews Would Pose Credit Concerns for US Health Insurers During the last week of February, advocacy groups filed comments to the Department of Health and Human Services (HHS) regarding the agency¡¯s proposed premium rate increase regulations released in December. A key element of the proposed regulations requires an HHS review of all health insurance rate increases of 10% or more to determine if the increase is ¡°reasonable,¡± as defined in the proposal. The proposed rate regulations are credit negative for health insurers, as they may interfere with the approval of rate increases that they need to maintain their profit margins. The regulations are scheduled to become effective 1 July, making the adoption of final regulations imminent. Our credit concern is that rather than scrutinizing the adequacy of premium rates to cover liabilities, the regulations emphasize the appropriateness of rate increases from a public advocacy viewpoint, where affordability is a driving issue. This process is likely to result in a denial or delay of some rate increases that may be actuarially sound and necessary to maintain profit margins, which is an important factor from a credit perspective. As a result, implementation of the proposed regulations would be credit negative for health insurers. We expect the regulations to negatively impact health insurers¡¯ credit profiles and that is factored into our negative outlook on the sector.16 Because insurance is regulated at the state level, HHS does not have the authority to deny a rate increase. Instead, its review process is designed to provide additional scrutiny and rigor to a state¡¯s existing review process. And, if HHS determines any rate increase to be ¡°unreasonable¡± under its prescribed review process, states would have a justification to deny a rate increase. Under HHS¡¯s proposed methodology, an ¡°unreasonable¡± rate increase is one found to be excessive, unjustified, or unfairly discriminatory. Given the volume of rate increases that may need to be reviewed under the proposed 10% limit, we are concerned that a lengthy or backed-up review process would delay rate-increase approvals, which could hurt insurer¡¯s profitability even if rates are ultimately approved. Over the past several months, we have seen examples where state regulatory agencies have denied or delayed premium rate increases, resulting in net losses on the products impacted according to the health insurers. More recently, delays by regulators in California have resulted in WellPoint (financial strength A1 stable), UnitedHealth (financial strength A2 stable), and Aetna (financial strength A1 stable) postponing requested rate increases.
16
See Moody¡¯s Industry Outlook: US Healthcare Insurers: Outlook Remains Negative, 29 December 2010.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Rokhaya Cissé Associate Analyst +1.212.553.3870 rokhaya.cisse@moodys.com Laura Bazer Vice President - Senior Credit Officer +1.212.553.7919 laura.bazer@moodys.com
Proposed FHLB Reform Will Hurt Liquidity of US Life Insurers Last Tuesday, US Treasury Secretary Timothy Geithner told the House Financial Services Committee that the Federal Home Loan Banks (FHLBs) should be reformed to ¡°include instituting single district membership, [and] capping the level of advances for any institution.¡± If adopted, such reforms would be credit negative for some US life insurers that use the FHLBs as a readily available, and relatively cheap, source of liquidity. The FHLB system was established by the Federal Home Loan Bank Act of 1932 to provide a reserve banking system to support thrift institutions¡¯ residential mortgage lending activities. These days, it counts insurance companies with mortgage loan portfolios among its members. Membership is obtained by eligible financial institutions with the purchase of untraded FHLB capital stock. The exhibit below shows some of the public life insurance companies with FHLB membership likely to be affected by the Obama administration¡¯s proposed reforms.
EXHIBIT 1
Insurance Company Membership in FHLBs Common Stock in FHLB Ticker Member Subsidiary FHLB Membership With Total FHLB Liabilities Capacity
$M as of December 31, 2010
MetLife Insurance Company of Connecticut (Aa3, Negative) Metropolitan Life Insurance Company (Aa3, Negative) MET MetLife Investors Insurance Company (Aa3, Negative) General American Life Insurance Company (Aa3, Negative) MetLife Bank (unrated) PRU GNW DFG LNC PL RGA PFG Prudential Insurance Company of America (A2, Stable) Prudential Retirement Insurance & Annuity Company (A2, Stable) Genworth Life Insurance Company (A2, RUR-down) Genworth Life & Annuity Insurance Company (A2, RUR-down) Reliance Standard Life Insurance Company of Texas (unrated) Lincoln National Life Insurance Company (A2, Stable) Protective Life Insurance Company (A2, Stable) RGA Reinsurance Company (A1, Stable) Principal Life Insurance Company (Aa3, Stable)
Boston New York Des Moines Des Moines New York New York Boston Pittsburgh Atlanta Dallas Indiannapolis Cincinnati Des Moines Des Moines
70 890 10 10 187 N/A N/A 24 47 N/A N/A 61 19 N/A
100 12,600 0 0 3,800 2,500 0 493 140 55 350 976 199 2,748**
N/A N/A N/A N/A N/A 6,200 1,100 N/A 798 N/A 630 1,016 997 N/A
**Represents the amount of securities posted and does not necessarily equal the company's total liability Source: 2010 10K filings and NAIC annual statements
Current eligibility rules require life insurers to have mortgage-related assets that reflect a commitment to housing finance. Members may obtain loan advances from the 12 regional banks that make up the FHLB system by posting real estate related securities as collateral. Provided that arrangements of pledged collateral are maintained, members can get same-day access to funds upon request. Insurance companies have used these advances as operating liquidity to manage expected or unexpected cashflow shortfalls, and to opportunistically buy attractively priced bonds. They have also,
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
at times, used the low-cost FHLB advances to reduce their cost of funds and increase yields on their institutional investment product (IIP) spread lending business, reducing capacity that could be used for emergency liquidity. Total FHLB liabilities of our rated