Azerbaijan, Baku, Feb. 18/ Trend , N. Ismayilova/
Depositor preference in the Commonwealth of Independent States refers to the priority of claims of depositors over other senior unsecured creditors in case of a bank's insolvency according to the Fitch Rating report Depositor Preference in CIS: Limiting Recovery Prospects for Banks' Bondholders.
Depositor preference refers to the priority of claims of (usually retail, but sometimes also corporate and bank) depositors over other senior unsecure d creditors in case of a bank's insolvency.
In a special report published today, Fitch says that although depositor preference exists in some form in each of the eight CIS countries where the agency has assigned bank ratings.
Fitch considers depositor preference strong in Russia, Ukraine and Kazakhstan, where both uninsured retail depositors and the deposit insurance fund (which assumes claims of compensated depositors) rank senior to bondholders.
Depositor preference takes a softer form in Armenia, Azerbaijan and Uzbekistan, where either the fund or uninsured depositors (but not both) have priority.
Subordination seems to be weakest in Belarus, but could become significant if the deposit insurance fund is unable to compensate all depositors.
In Georgia, the statutorily mandated complex waterfall of priorities can, in practice, create significant subordination for bondholders.
Retail funding accounts for between 21 percent and 30 percent of banking sector liabilities in six of the CIS countries reviewed. The proportion is significantly lower in Kazakhstan (14%) and Uzbekistan (13%), reflecting those countries' reliance on foreign funding and corporate/interbank deposits, respectively.
Bringing together legal provisions and sector liability structures, Fitch estimates that holders of senior unsecured bonds are, on average, most highly subordinated in Uzbekistan (33%), followed by Georgia (30%), Ukraine (27%) and Russia (24%). Subordination of senior bondholders is notably lower in Azerbaijan (18%), Kazakhstan (14%) and Armenia (9%).
Subordination is potentially absent in Belarus, but this depends on the ability of the deposit insurance fund to compensate depositors. At the same time, actual degrees of subordination could differ significantly across banks within a single country.
To date, the subordination caused by depositor preference in these countries has not led Fitch to notch downwards the ratings of banks' senior unsecured debt from their Long-term Issuer Default Ratings (IDRs).
In the future, though, banks across the region with higher levels of retail or related-party funding, and Uzbek and Georgian banks in general, would be most at risk of such notching, the report said.
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