Feb 01 - Fitch Ratings has affirmed AccessBank’s (AB) Long-term foreign currency Issuer Default Rating (IDR) at ‘BB+'. The Outlook is Stable. A full list of rating actions is at the end of this comment.
RATING ACTION RATIONALE AND DRIVERS: IDR AND SUPPORT RATING
The affirmation of AB’s IDRs and Support Rating reflects Fitch’s view of the moderate probability of support available from its international financial institution (IFI) shareholders, in particular KfW (‘AAA’/Stable; 20% stake), the European Bank for Reconstruction and Development (EBRD; ‘AAA’/Stable; 20%) and the International Finance Corporation (IFC; 20%). At the same time, Fitch notes some uncertainty in respect to timely support always being provided if needed, given the fragmented nature of the shareholder structure; the limited strategic importance of the bank for its IFI owners and their intention to gradually decrease their stakes in the bank in the medium-term. For these reasons, AB’s Support Rating was affirmed at ‘3’, and the Long-term IDR at ‘BB+'.
A marked weakening of support propensity, as assessed by Fitch, would result in AB’s IDR being downgraded, as would a multi-notch downgrade of Azerbaijan (‘BBB-'/Stable). However, neither scenario is currently anticipated by the agency. Upside potential for AB’s ratings is limited in the foreseeable future.
AB’s Viability Rating (VR) of ‘b+’ is constrained by the potential cyclicality of AB’s performance and asset quality stemming from the highly volatile, structurally weak and oil-dependent Azerbaijan economy. Fitch believes that a marked and prolonged downturn in the economy could be particularly challenging for AB’s SME borrowers. AB’s significant reliance on wholesale funding is also credit negative.
On the positive side, AB’s VR reflects its solid bottom line results, a healthy liquidity profile underpinned by the fast amortizing and relatively liquid loan book, solid asset quality and performance to date, and significant loss absorption capacity.
AB’s asset quality indicators remain favourable: loans 90 days overdue equalled only 0.7% of the end-2012 loan book, while restructured loans and write offs added a further 0.6% and 0.5%, respectively. Fitch notes that the average non-performing loan (NPL) ratio for the SME segment in Azerbaijan is closer to 10% and questions the longer-term sustainability of AB’s solid asset quality metrics. The poor quality of financial information on AB’s SME borrowers requires tight control of asset quality, which is more challenging with portfolio growth, while the ability to cherry-pick the best borrowers is narrowing as competition in the segment intensifies.
As a mitigating factor, a significant margin of safety exists in the form of the bank’s capital cushion (at end-2012, AB’s capital buffer was sufficient to withstand a maximum 14% of credit losses), pre-impairment profitability (equal to a further 6% of loans), existing comfortable reserve coverage (4%) and reasonable de-leveraging capacity. However, Fitch expresses concerns that the bank has never been tested through a deep and lengthy recession, notwithstanding the positive track record during the Q408-Q109 crisis.
Fitch expresses concerns over AB’s significant reliance on wholesale funding (above 55% of end-2012 liabilities, including 17% attracted directly from the shareholders), but is satisfied that it is well diversified by lender and by maturity with moderate USD60m refinancing needs for 2013. The latter was 1.1x covered by the liquidity buffer at end-2012.
AB’s internal capital generation capacity remains solid (ROAE and ROAA for 2012 were a high 3.5% and 17%, respectively) but is likely to reduce somewhat in the near term, as competition increases and AB intends to pay dividends equal to roughly 40% of its annual profits starting from 2012. However, retained earnings should still be sufficient to maintain the regulatory capital ratio (24.8% at end-2012) considerably above the regulatory minimum (12%), given the targeted 20% loan growth.
Downside pressure on AB’s ratings could arise if capital is substantially eroded, for example as a result of sharp asset quality deterioration driven by a marked weakening of the Azerbaijan economy, for example in case of a much lower oil price.
Near-term upside potential for AB’s ratings is limited and would probably require notable improvements in the operating environment. However, an extended track record of sound performance and gradual reduction of dependence on wholesale funding would be credit positive.
The rating actions are as follows:
Long-term IDR: affirmed at ‘BB+'; Outlook Stable
Short-term IDR: affirmed at ‘B’
Viability Rating: affirmed at ‘b+’
Support Rating: affirmed at ‘3’