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Fitch Affirms Four Azerbaijani Banks; Upgrades Bank Technique to 'B-'
December 19, 2013 / 4:11 PM / 4 years ago

Fitch Affirms Four Azerbaijani Banks; Upgrades Bank Technique to 'B-'

(The following statement was released by the rating agency) MOSCOW/LONDON, December 19 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of International Bank of Azerbaijan (IBA) at 'BB', AccessBank (AB) at 'BB+', and Kapital Bank (KB) and Pasha Bank (PB) at 'B+'. At the same time, the agency has upgraded Bank Technique's (BT) Long-term IDR to 'B-' from 'CC'. All five banks have Stable Outlooks. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS - ALL BANKS' IDRS AND VIABILITY RATINGS (VRS) The rating actions reflect limited recent changes in most of the banks' credit profiles and the currently stable operating environment. The latter is supported by high oil prices and significant budget spending, which remains the major growth driver for the non-oil economy and bank lending. Liquidity in the sector is adequate, underpinned by banks' reasonable deposit collection capacity and fairly sticky funding. The relatively high risk operating environment constrains the VRs of local banks at quite low levels. Fitch assesses the environment as high risk in light of Azerbaijan's weak institutional development, reflected in a weak business climate and limited financial transparency of the corporate sector, and potentially high cyclicality of the economy as a result of its commodity dependence. Banks' risks are further heightened by their often long-term and concentrated loan exposures, sometimes with significant grace periods and bullet repayments, including for project and acquisition finance purposes. In Fitch's view, these weaknesses are likely to translate into high and volatile levels of credit losses at most of the country's banks. The higher VRs of AB (bb-) and PB (b+) relative to IBA, KB and TB (b-) reflect their better track records, to date, of managing credit risks, and larger capital buffers. For more details and Fitch's outlook on the Azerbaijani banking system see "2014 Outlook: CIS and Georgian Banks Outlooks Mostly Stable; Downside Risks from Macro and Asset Quality Weaknesses" dated 13 December 2013 at KEY RATING DRIVERS - IBA The affirmation of IBA's IDRs, SR and SRF reflects Fitch's view that there is a moderate probability of support for the bank, if needed, from Azerbaijan (BBB-/Stable). This view factors in (i) IBA's high systemic importance stemming from its large domestic franchise (the bank accounts for 35% of sector assets) and substantial funding from state-owned corporations (AZN1bn or 16% of end-3Q13 liabilities); (ii) the bank's majority (50.2%) state ownership; (iii) its fairly small size relative to the sovereign's available resources; and (iv) the potentially significant reputational damage for the authorities in case of IBA's default. However, Fitch views the sovereign's propensity to provide support as only moderate due to the recent track record of quite slow (and limited in volume) capital support in 2011-2012 and weaknesses in the bank's corporate governance. Fitch views as moderately positive the recapitalisation plan announced by IBA in October 2013, which provides for total equity injections of AZN500m by end-2016, including AZN100m already contributed in 4Q13. However, in the agency's view, planned loan growth (management targets 15%-20% per annum) and dividend payments mean that there is unlikely to be a significant improvement in capital ratios. IBA's 'b-' VR primarily reflects its weak capitalisation, as reflected by the low 6.8% Fitch Core Capital (FCC) ratio at end-1H13, and asset quality. Although reported NPLs (non-performing loans, 90 days overdue) were a moderate 8% at end-1H13, in Fitch's view, high risk loans among IBA's largest exposures, including lending to start-up businesses and construction loans exposed to high non-completion risk, were equal to a sizable 1.3x of end-1H13 FCC. Additional capital pressure stems from a potentially under-provisioned promissory notes portfolio (1.7x FCC net of loan impairment reserves; LIR), which is largely exposed to construction projects in Russia. In Fitch's view, the recoverability of these assets will be lengthy and may require absorption of considerable additional credit losses. In the absence of meaningful amortisation of the loan book and significant dependence on wholesale funding (at end-1H13, the loans/deposits ratio was a high 2.1x) refinancing risk is significant. However, the near-term refinancing schedule is manageable for IBA, following recent funding rollovers. In assessing IBA's liquidity position Fitch also takes moderate comfort from the stickiness of IBA's customer funding and potential liquidity support from the authorities in case of need. KEY RATING DRIVERS: BT The upgrade of BT's IDR and VR reflects considerable progress in work-outs of impaired loans, resulting in significant improvement in the capital position, and currently comfortable liquidity. However, the ratings still reflect weak asset quality and tightly managed capital. BT's new controlling private shareholder provided AZN10m of equity in 1H13 and USD10m of subordinated debt in December 2013, as a result of which Fitch expects the bank to be compliant with the minimum 12% regulatory capital ratio requirement by end-2013. However, BT's capital will still be insufficient to absorb all legacy loan impairment problems given still sizable unreserved NPLs and moderate reported pre-impairment profit (equal to 16%, annualised, of average equity in 1H13). BT's NPLs net of reserves amounted to AZN67m (1.7x FCC) at end-1H13, a decrease of AZN84m compared with end-2012. However, foreclosed assets and investment property comprised a further 57% of FCC at end-1H13. Management expects further NPL work outs of AZN60m by end-2014, which Fitch estimates would reduce net NPLs to about 75% of FCC. About half of the planned recoveries relate to the largest group of interconnected problem exposures, where Fitch views recovery prospects as reasonable, given healthy collateral quality and management's track record to date. KEY RATING DRIVERS: AB AB's IDRs and Support Rating are underpinned by the moderate probability of support from its international financial institution (IFI) shareholders, in particular KfW (AAA/Stable; 20% stake), the European Bank for Reconstruction and Development (AAA/Stable; 20%) and the International Finance Corporation (20%). At the same time, AB's Support Rating of '3' and Long-term IDR of 'BB+' reflect some uncertainty with respect to timely support always being provided if needed, given the fragmented nature of the shareholder structure and the limited strategic importance of the bank for its IFI owners. The upgrade of AB's VR to 'bb-' from 'b+' reflects the bank's extended track record of sound performance in a challenging operating environment, its sound financial metrics in terms of profitability, asset quality and capitalisation, and strong governance and management. At end-1H13 AB reported 0.3% NPLs, while restructured loans and write-offs during the period were equal to a further 0.6% and 0.3% of the portfolio, respectively. Capitalisation remains a credit strength, with the regulatory ratio standing at 19.7% at end-1H13, although this is likely to decrease moderately due to continued loan growth and dividend payments. Loss absorption capacity through the income statement is also significant, with pre-impairment profit equal to 6.5% of average loans in 3Q13 (not annualised). AB's reliance on wholesale funding is high, with a loans/deposits ratio of 306% at end-3Q13. However, Fitch views refinancing risks as moderate given the role of development institutions as suppliers of funding and the cash-generative loan book. KEY RATING DRIVERS: KB KB's IDRs, Support Rating and Support Rating Floor are driven by potential support from the Azerbaijan authorities in case of need. This view is based on (i) KB's systemic importance, resulting from its social role in distributing pensions and other budget payments through the largest branch network in the country; (ii) KB's active involvement in state-funded infrastructure development projects; and (iii) the close informal relationships between KB and/or its shareholders with the authorities. At the same time, Fitch continues to view the support propensity as only limited given KB's currently modest, albeit growing, commercial franchise and its private ownership. KB's VR reflects the track record of weak performance and asset quality and high balance sheet concentrations. At the same time, the rating also considers the bank's improving capitalisation (regulatory CAR of 22% at end-3Q13) - supported by the recent AZN30m and further planned equity injections and stronger profit generation (annualised ROAE of 19% in 3Q13) - the absence of material non-government wholesale borrowings and the healthy liquidity position. At end-1H13, KB's reported NPLs were equal to around 15% of gross commercial loans (end-2012: 22%) and were 79% covered by reserves. Asset quality is further undermined by significant related party lending (around 1.7x of FCC at end-1H13) and two lumpy, high risk unsecured loans (combined equal to 1.6x of FCC) to commercial construction projects, underscoring deficiencies in KB's risk management. KB also acts as a pass-through vehicle for some large state-financed loans to strategically important companies. These are booked off balance sheet due to sovereign guarantees that should prevent KB from bearing any credit losses on these exposures. KEY RATING DRIVERS: PB's IDRS AND VR The affirmation of PB's ratings reflects the bank's limited franchise and short track record; potential contingent risks arising from the construction business of the broader group; considerable political risk and uncertainty with respect to the long-term sustainability of the bank's sizeable related party funding (50% of end-H113 liabilities); and significant balance sheet concentrations. On the positive side, the ratings consider PB's currently solid financial metrics, reflected in a sizable capital buffer, considerable liquidity cushion (46% of end-1H13 liabilities) and reasonable performance. PB's credit profile has also benefited to date from the bank's powerful shareholder in terms of capital injections and access to funding. Reported NPLs increased sharply to 28% of loans at end-H113 (on a net basis, equal to 48% of FCC) from 11% at end-2012. Fitch views the largest NPL (equal to 20% of FCC) as highly risky, as it represents a long-term exposure to a project at the initial stage of completion. However, other NPLs have either since been repaid/refinanced or benefit from credit enhancement. Additional comfort stems from PB's significant loss absorption capacity, reflected by its high 35% FCC ratio at end-1H13, and adequate pre-impairment profitability (annualised pre-impairment ROAE of 17% in 1H13). RATING SENSITIVITIES - IBA'S, KB'S AND AB'S SUPPORT-DRIVEN RATINGS IBA's and KB's support-driven IDRs could be downgraded if the sovereign is downgraded, their systemic importance markedly decreases or the banks fail to receive timely support, when needed. A multi-notch sovereign downgrade or a marked weakening of shareholder support could result in a lowering of AB's ratings. However, these scenarios are currently regarded as unlikely by Fitch. Upside potential for the three banks' support-driven ratings is limited. RATING SENSITIVITES - ALL BANKS' VRS, BT's and PB's IDRS Upgrades of the banks' VRs and BT and PB's IDRs could be driven by a significant improvement in the operating environment, improved track records of managing asset quality and stronger capitalisation. Downward pressure on the ratings could result from negative developments in these areas. KEY RATING DRIVERS AND RATING SENSITIVITIES - BT's AND PB's SRS AND SRFS BT's and PB's SRFs of 'No Floor' and '5' Support Rating reflects their relatively limited systemic importance, as a result of which extraordinary support from the Azerbaijan authorities cannot be relied upon, in Fitch's view. Although support from the banks' private shareholders is possible, it cannot be reliably assessed. Fitch does not expect any revision of the bank's SRFs or Support Ratings in the foreseeable future. The rating actions are as follows: IBA Long-term foreign currency IDR: affirmed at 'BB', Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB' AB Long-term IDR: affirmed at 'BB+'; Outlook Stable Short-term IDR: affirmed at 'B' Viability Rating: upgraded to 'bb-' from 'b' Support Rating: affirmed at '3' KB Long-term foreign currency IDR: affirmed at 'B+', Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b-' Support Rating: affirmed at '4' Support Rating Floor: affirmed at 'B+' PB Long-term foreign-currency IDR: affirmed at 'B+'; Outlook Stable Short-term foreign-currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b+' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' BT Long-term IDR: upgraded to 'B-' from 'CC'; Outlook Stable Short-term IDR: upgraded to 'B' from 'C' Viability Rating: upgraded to 'b-' from 'cc' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Contacts: Primary Analyst Dmitri Vasiliev Associate Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow, 115054 Secondary Analyst (AB, KB, PB) Maria Kuraeva Analyst +7 495 956 9901 Secondary Analyst (IBA, BT) Ruslan Bulatov Analyst +7 495 956 9982 Committee Chairperson Alexander Danilov Senior Director +7 495 956 9901 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: Additional information is available at Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, is available at Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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