ly among the lowest in Europe, and subduing consumer credit growth by, among other things, lowering the 85% LTV ceiling or introducing amortisation requirements for mortgage loans. The Swedish finance minister has indicated that Swedish banks should prepare for a 1percentage-point increase in capital requirements every year ¡°over the next few years.¡± In response to the proposed new measures, the Swedish Bankers¡¯ Association expressed concern about the international competitiveness of Swedish banks if the Swedish authorities impose rules that are stricter than those in other European countries. We note that, according to the Swedish FSA, the four large Swedish banks15 already fulfill or are close to fulfilling the stricter Basel III capital requirements. However, we believe that although the proposals may have an immediate negative effect on banks¡¯ profitability, any increased capital requirements and reductions in risk-taking capacity are credit positive and may lead to lower funding costs in international markets.
Stocks 1 %C9%CF%BA%A3LPP Lendersmortgagepayments 3search11 5 Mortgage
Source: Swedish Central Bank. Defined as gross loans subject to individual impairments and loans that are not impaired but are overdue 60-plus days. For example, see speech by Central Bank Governor Stefan Ingves at Riksgag Committee on Finance, 1 March 2011. Nordea Bank AB (Aa2 Stable; C+/A2 Negative), Svenska Handelsbanken AB (Aa2 Stable; C+/A2 Stable), SEB AB (A1 Stable; C-/Baa2 Stable) & Swedbank AB (A2 review for upgrade; D+/Baa3 review possible upgrade). The bank ratings shown in this article are the bank¡¯s deposit rating, its standalone bank financial strength rating mapped to the long-term scale, and the corresponding rating outlooks.
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MOODY¡¯S WEEKLY CREDIT OUTLOOK
7 MARCH 2011
NEWS & ANALYSIS
Credit Implications of recent worldwide news events
Yana Ruvinskaya Associate Analyst +7.495.228.6075 yana.ruvinskaya@moodys.com Yaroslav Sovgyra Vice President - Senior Credit Officer +7.495.228.6075 yaroslav.sovgyra@moodys.com
Ukraine¡¯s Plan to Rein In Foreign Currency Lending Is Credit Positive for Banks
Last Monday, Sergey Arbuzov, head of the National Bank of Ukraine (NBU), stated that the NBU intends to re-impose restrictions on foreign currency lending that expired at the end of 2010. These restrictions, which we expect to be reflected in the upcoming law on foreign currency regulation, are credit positive for Ukrainian banks, as they will help minimise the foreign currency and credit risks of the banks. Starting in January, Ukrainian banks were able to provide individuals with retail loans in foreign currencies because restrictions implemented in June 2009 had expired. However, the NBU has now indicated it intends to continue, and even tighten, its previous restrictive policy on foreign currency lending 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
Foreign Currency Lending of Ukrainian Banks
70% 60% 50% 40% 30% 20% 10% 0% 2004 2005 2006 2007 2008 2009 2010
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.
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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 fr