Parex Bank’s ratings downgraded; outlook negative

Capital Intelligence, the international credit rating agency, has downgraded Parex Bank’s long-term foreign currency rating to ‘bb+’ from ‘BBB’ and its short-term foreign currency rating to ‘b’ from ‘A’3. At the same time Capital Intelligence has lowered Parex’s financial strength rating to ‘b+’ but raised its support rating to 3 from 4 in response to the government’s demonstrated support for the bank and its acquisition by the state-owned Mortgage and Land Bank.
The outlook for the ratings is changed to negative from stable in expectation of a further deterioration in Parex’s financial profile and in line with the negative outlook assigned by Capital Intelligence to the sovereign’s ‘BBB-‘ credit rating. The revised ratings for Parex Bank are based on publicly available information owing to the bank’s decision to cease its cooperation with Capital Intelligence following the change in ownership.
Parex Bank, Latvia’s second largest bank with LVL 3.1 bln (USD 5.6 bln) in assets, was forced to seek protection from the authorities after customers lost confidence in the bank and withdrew the equivalent of LVL 60 mln in deposits in early November.
In return for state support, the founders of the bank, Valery Kargin and Viktor Krasovitsky, who held 85% of the bank’s shares, transferred 51% directly and pledged their remaining 34% to the state-owned Mortgage and Land Bank. The government intends to sell its holding in Parex Bank to a strategic investor at later date.
While Parex has the largest non-resident deposit base among Latvian banks, it has focused more closely on its domestic franchise in recent years. Capital Intelligence expects that the sharp economic slowdown in Latvia and the Baltics as a whole will lead to a further deterioration in asset quality and increase in non-performing loans going forward. This in turn is likely to have an ongoing impact on the bank’s profitability due to increased provisioning requirements and thus impair capital adequacy, which is already under pressure.
Parex’s foreign currency ratings are underpinned by the government’s support for the bank, which has so far included a liquidity injection and a commitment to underwrite the refinancing of EUR 775 mln of syndicated loans falling due in 2009. The bank is also likely to require additional equity capital, which Capital Intelligence would expect its new owners to provide.