RPT-Fitch Upgrades PTA Bank to 'BB'; Outlook Stable

Fri Oct 4, 2013 6:07am EDT

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Oct 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded Eastern and Southern African Trade and Development Bank's (PTA Bank) Long-term Issuer Default Rating (IDR) to 'BB' from 'BB-'. The National Long-term rating has been upgraded to 'AAA(ken)' from 'AA+(ken)', and the Short-term IDR affirmed at 'B'. The Outlook is Stable.

KEY RATING DRIVERS

The upgrade of the rating and the Stable Outlook reflect the following key rating factors:

-The USD100m capital increase approved in September 2013 will strengthen the bank's capitalisation, which had been affected, in recent years, by rapid growth in lending (+20.8% in 2012); its equity to asset ratio declined to 18.3% at end-June 2013, from 20.2% at end-2010. The 50% increase in paid-in capital will be spread over three years. The African Development Bank (AfDB) will subscribe USD20m and pay it in full in 2013, resulting in an increase in its share-ownership.

Strong capitalisation is one of the key factors supporting the ratings of PTA Bank. It is underpinned by a high level of internal capital generation, owing to the strong profitability of the bank; return on equity (ROE) was 16.4% in 2012, which is well above peers.

The capital increase will allow PTA Bank to maintain a high level of capitalisation despite sustained growth in operations. Its equity to asset ratio should remain above 20% in the coming years, despite a projected 10% to 15% growth in lending over the next three years. Leverage, which peaked at 386% in 2012, will progressively decline.

-An increase in trade finance operations, which are less risky than project loans, has helped the bank reduce its loan impairment ratio, which decreased to 4.1% at end-June 2013, from 11.1% at end-2010. Its large exposure to the Zambian government (B+/Stable) has been partly sold to other counterparties and, in 2013, further reduced through the purchase of credit insurance. However, government-backed trade finance operations have been expanded to Malawi and Sudan in 2013, leading to an increase in exposure to these countries. Risk concentration, nevertheless, remains well controlled compared with other multilateral development banks (MDBs); its five largest exposures accounted for 24.1% of total loans at end-June 2013.

Because of the development in trade finance, the bank is increasingly resorting to short-term (ST) debt. However, liquidity remains solid, as the bank maintains adequate liquid assets and unused credit lines, representing 94% and 106% of ST debt at end-June 2013 respectively. As with other African sub-regional MDBs, the credit quality of investment is low and operational risk may increase as a result of expansion in countries exposed to a poor business environment, such as Zimbabwe. PTA Bank's other risk management policies are in line with that of other sub-regional MDBs.

The bank is owned by 18 African countries and two non-regional shareholders, the African Development Bank (AfDB, AAA/Stable) and China (A+/Stable). Given their low credit quality overall - the estimated average rating of callable capital is 'B+' - Fitch considers that the bank shareholders' capacity to provide support in case of need is weak. However, the capital increase approved in September 2013 is evidence of their willingness to provide support.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's expectation that PTA Bank's credit profile will remain consistent with a 'BB' rating. Downward pressure on the ratings would occur in the event of:

- a material increase in loan impairments. The rating would be particularly sensitive to an accumulation of arrears on one of the large sovereign exposures, such as Malawi, Sudan, Zambia or Zimbabwe

- a faster-than-projected growth in lending, leading to a deterioration in capitalisation measures or an increase in risk concentration

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions. In particular, the ratings assume that the capital subscribed by shareholders will be paid over a three-year period, as indicated by management. Failure or delays to pay the capital according to schedule would place negative pressure on the ratings, unless the bank adjusts its business volumes to stabilise capitalisation.

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