(The following statement was released by the rating agency)
Nov 9 - Fitch Ratings has affirmed Crown Agents Bank Ltd's (CABK) Long-Term
Issuer Default Rating (IDR) at 'BBB+', Viability Rating (VR) at 'bbb+' and
Short-Term IDR at 'F2'. The Support rating (SR) has been downgraded to '5' from
'3' and the Support Rating Floor has been revised to 'NF' from 'BB'.
A full list of rating actions is at the end of this rating action commentary.
RATING ACTION RATIONALE
The IDRs reflect the bank's strong liquidity, resulting from its liability
driven balance sheet, and limited risk profile. As its business model consists
of investing its bank deposits in low risk assets, of similar maturity (mostly
cash and interbank placements), lending is minimal. It has not suffered any
credit losses in more than a decade. The risk-averse nature of the bank has
resulted in a policy of maintaining placements only with highly rated
counterparties. However, these deposits are highly concentrated, particularly
given the small absolute size of its capital base and the ratings also take into
account this risk. The Financial Services Authority (FSA) has given the bank a
special temporary dispensation in respect of concentration limits, giving it
time to reduce it in line with other financial institutions.
The bank's liquidity is supported by the "sticky" nature of about two thirds of
these deposits, which have been built up through relationships developed over
many years. Aid-related money (the balancing third of deposits) cannot be
withdrawn unless the aid contract is cancelled or if payments are due.
CABK was awarded a new umbrella contract with the UK Department for
International Development (DFID) in 2012, after its previous contract expired in
spring 2012. The new contract is expected to result in significantly smaller aid
flows through CABK and in turn, result in lower earnings. While the new
management team has plans to supplement its aid business with further
fee-generating business with established customers (pension fund management, L/C
confirmations, foreign currency dealing), it is too early to quantify how
successful this strategy will be.
CABK's capital ratios are satisfactory and are boosted by low risk weighted
assets which reflect the bank's limited risk profile. They do not take
concentration risk into account, however. On the other hand, CABK's parent has
set aside committed additional capital, which it will make available to the bank
should the need arise.
Fitch has downgraded CABK's Support Rating and revised the Support Rating Floor
as it believes that support from the UK government, although possible, cannot be
relied upon. This is in line with Fitch's view of possible external support for
non-systemically important banks in the UK.
RATING DRIVERS AND SENSITIVITIES
Upside to the ratings is limited given the high concentration risk in its book
and the reducing business flow. However, the ratings would suffer some negative
pressure if the relationship with any of the large aid donors is tarnished, or
if the bank undertakes greater risk in order to improve revenues. This could
take the form of greater mismatches between assets and liabilities, greater
business undertaken with lowly rated or unrated counterparties, or if its
off-balance sheet uncollateralised exposure rises.
The rating actions are as follows:
Crown Agents Bank Limited
Long-Term IDR affirmed at 'BBB+'; Outlook Stable
Short-Term IDR affirmed at 'F2'
Viability Rating affirmed at 'bbb+'
Support Rating downgraded to '5' from '3'
Support Rating Floor revised to 'NF' from 'BB'
(Caryn Trokie, New York Ratings Unit)