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Oct 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed African Export-Import Bank’s (Afreximbank) Long-term Issuer Default Rating (IDR) at ‘BBB-‘ and Short-term IDR at ‘F3’. The Outlook has been revised to Negative from Stable.
The affirmation of Afreximbank’s ‘BBB-‘ IDR balances the bank’s good loan quality - related to its focus on short-term, secured trade finance facilities, improved geographic concentration risk, adequate liquidity and steady profitability against its moderate capitalisation and limited shareholder support. The revision of the Outlook to Negative reflects the recent decline in the bank’s capitalisation, following delays in the expected capital increase.
Capitalisation is moderate and declining due to aggressive loan growth in recent years (+32.2% in 2012). At 19.1% at June 2013 (2008: 35.2%), the Basel II capital adequacy ratio has worsened significantly and leverage has deteriorated.
The bank’s management intends to stabilise capitalisation by year-end through raising equity from its existing public shareholders or a reduction in lending activity.
The bank’s loan portfolio shows good quality despite the difficult operating environment, with lending activity mostly focused in sub-Saharan Africa. Loans extended by the bank are typically short-term, self-liquidating trade finance facilities extended to African banks and corporates. At June 2013, 96% of net loans were secured, through trade receivables (frequently from OECD buyers), bank guarantees and/or cash. The loan portfolio has therefore historically performed well. At June-2013, NPLs accounted for a low (albeit rising) 2% of gross loans outstanding. The bank has steadily geographically diversified its portfolio away from its two main countries of operations, Nigeria and Zimbabwe.
Fitch deems liquidity adequate. Although the pool of treasury assets is lower than peers, liquidity is supported by the short-term tenor of loans.
Consequently, at June 2013, short-term liabilities were more than twice covered by treasury assets and loans maturing within a year. Access to undrawn credit lines, which covered 66% of short-term liabilities at June 2013, also insulates the bank from liquidity risk.
Unlike other multilateral development banks, Afreximbank is a dividend-distributing institution, with higher profitability than peers. RoE remains high by industry standards, at 11.5% in 2012 (2011: 12%).
In line with the evolving pattern of African trade, a share of Afreximbank’s loans is becoming more sophisticated and longer term. Although Fitch expects Afreximbank’s main activity to remain focused on secured trade finance, payment risk is increasingly transferred to African buyers rather than OECD ones, and the average maturity of loans materially increased to 23 months in 2012 (2008: three months).
Shareholders’ support is limited. On top of their paid-in shares, Afreximbank’s 125 shareholders have committed to provide callable capital amounting to USD255.7m at June-2013 (64% of which is provided by African sovereigns and public institutions), which can be called by the bank in case of need.
Shareholders have demonstrated willingness to support the bank in the past, but their ability to do so remains weak, with an estimated average rating of ‘B+’. Afreximbank’s medium-term objective through the capital increase is to attract new private shareholders which will not provide callable capital.
The Negative Outlook reflects the following risk factors that may, individually or collectively, result in a downgrade of the ratings:
- Further decline in capitalisation over the coming year, as a result of either the inability to raise capital or curb lending activity.
- Deterioration in asset quality, illustrated by a material rise in NPLs.
The current Outlook is Negative. Consequently, Fitch’s sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to an upgrade. However, future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include:
- Demonstrated stabilisation of the bank’s capitalisation.
- Maintenance of adequate quality of the loan portfolio.