“The rating action reflects the recovery of Kapitalbank’s capital adequacy (CAR) ratio to the minimum level set by the regulator after a seven-month breach of this requirement. The reported CAR now stands only 10 basis points above the minimum requirement, which we view as a narrow margin. The bank is therefore still vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments. The very low regulatory capital buffer leaves limited capacity to absorb unexpected credit losses (for example, if a few of the largest borrowers underperform) and foreign currency losses (as a result of local currency depreciation, which is not our base case),” the agency said.

“Since our last research update on Jan. 30, 2018, Kapitalbank has raised its CAR to 12.6% as of April 1, 2018, from 10.6% on Jan. 1, 2018 (the minimum is 12.5%). The improvement was due to significant retained earnings (including significant one-off profit in the first quarter of 2018) and revaluation of fixed assets. We note that a significant part of total capital is immobilized, with the book value of the bank’s premises and other buildings forming around 42% of total equity on April 1, 2018. We believe the value of this real estate may be uncertain and vary, which could result in capital volatility,” the statement of the agency underlined.

“We understand that management has specific plan for 2018 to further improve its capital. While we view positively the presence of clearly defined measures to increase regulatory capitalization, any ratings upgrade will depend on the successful and timely implementation of the plan. Finally, we note that the minimum CAR set by the regulator will increase to 13% in 2019, putting additional pressure on Kapitalbank,” S&P Global Ratings said.

“The positive outlook on Kapitalbank stems from our view that the bank will likely continue building its regulatory capital buffer over the next 12-18 months, assuming an absence of significant unexpected credit or foreign currency losses,” it added.

“We would consider a positive rating action if we saw sufficient capital build-up and a remote risk of Kapitalbank violating the regulatory CAR. A positive rating action would also require proof that the bank was able to deal with credit and foreign currency risks, while minimizing the share of foreign currency deposits so that they were close to the system average,” S&P Global Ratings said.

“A negative rating action could follow if we observed that the bank was not able to comply with regulatory CAR requirements. In particular, this might result from an unexpected local currency devaluation, triggering increasing foreign currency mismatch on the bank’s balance sheet and potential difficulty entering into foreign currency swap agreements to hedge currency risks. A negative rating action is also possible if we envision specific default scenarios over the next 12 months,” the statement concluded.