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March 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Albania’s Banka Kombetare Tregtare (BKT) Long-term Issuer Default Ratings (IDRs) of ‘B’ with a Negative Outlook and a Viability Rating (VR) of ‘b’. A full list of rating actions is at the end of this rating action commentary.
BKT has been majority-owned since 2006 by Calik Holdings (Calik), a privately-owned Turkish holding company engaged in various businesses, mainly in its home market. BKT was the second-largest bank by total assets and customer deposits and loans in the relatively small Albanian banking sector at end-2013.
KEY RATING DRIVERS - IDRs, SUPPORT RATING, SUPPORT RATING FLOOR
BKT’s IDRs are driven by its standalone risk profile, as reflected by the bank’s VR. In Fitch’s view support from BKT’s parent and from the Albanian state is possible but cannot be relied upon. The bank’s Support Rating Floor of ‘No Floor’ reflects uncertainty about the sovereign’s willingness to bail out failed banks, limited sovereign financial flexibility, the foreign ownership of BKT and risks related to corporate governance issues.
KEY RATING DRIVERS - VR
The VR reflects BKT’s exposure to weak operating environments in Albania and Kosovo, high levels of moderately reserved non-performing loans (NPLs), risks related to rapid recent loan growth including outside its home markets and potential contagion risks from the bank’s ultimate owner through related party transactions. BKT’s capitalisation is moderate given the structure of the bank’s assets, loan book concentrations, unreserved NPLs and the potential for further asset quality deterioration.
BKT’s solid domestic market position, healthy liquidity and limited refinancing risks are positive for the bank’s ratings.
BKT’s main credit risk lies with the bank’s loan book which is exposed to Albania, Kosovo (15% of the loan book at end-2013) and international companies (12% of the loan book, most of which related to Turkey). Material credit risk also arises from BKT’s portfolio securities (43% of total assets at end-2013), where exposures are largely non-investment grade. Holdings of Albanian T-bills and notes were a significant 26.5% of total assets.
BKT’s NPL ratio (loans included in the substandard, doubtful and loss loan categories as defined by Bank of Albania) was a high 11.7% at end-2013 although still significantly below the 23.5% ratio for the overall banking sector. IFRS loan loss reserves coverage of NPLs was low (25% at end-2013). Regulatory reserves, used to calculate regulatory capital adequacy ratios, are higher than IFRS accounts. Taking the latter into consideration, the NPL coverage ratio would increase to 72% at end-2013 and unreserved NPLs would decline to a more acceptable 14% of BKT’s Fitch core capital from 38% based on IFRS reserves. Loans past due more than 90 days accounted for 8.6% of gross loans at end-2013 (2012: 8.2%) and were 97% covered by total reserves.
However, Fitch notes that the operating environment in Albania and Kosovo remains weak and that the enforceability of collateral can be difficult. Foreign currency loans comprised 46% of the portfolio at end-2013, although the recent stability of the Albanian currency peg somewhat mitigates risks from these exposures.
BKT funds its operations largely with stable (mainly retail) customer deposits (87.5% of total funding at end-2013; denominated primarily in local currency or euros). The less liquid portion of the balance sheet, comprising loans to customers and some loans to banks, was just 40% of total assets, and the loans/deposits ratio was a low 42%. Liquidity is also supported by the substantial amount (equivalent to 18% of total assets) of unencumbered Albanian government securities that can be used in repo transactions with the central bank.
BKT’s regulatory capital adequacy ratio was 14.6% at end-2013, which Fitch views as moderate, particularly taking into account that regulatory capital requirements cover only credit risk, and the risk weighting on Albanian government bonds is 0%. BKT’s higher Fitch core capital ratio (17.8% at end-2013) was mainly driven by lower reserves in the IFRS accounts. Potential contagion risk from Calik includes the bank’s direct related party transactions (USD59m, 28% of Fitch core capital). These were largely off-balance sheet items and security holdings of and placements with Aktifbank (BKT’s sister bank in Turkey) at end-2013. At the same time, Aktifbank had deposits with BKT of USD11m.
In addition, an investment in asset-backed securities, originated by Aktifbank, was equal to USD79m or 37% of Fitch core capital, although the issue has a simple structure and BKT’s participation in the outstanding amount was around 24% at end-2013.
BKT’s reported operating profitability has been solid, with five-year average ROAE and ROAA of 22% and 1.69%, respectively. However, this partially reflects low IFRS loan impairment charges (LICs, on average equal to 11% of pre-impairment profit during the same period), resulting in moderate NPL coverage. 2013 profitability was also supported by a nonrecurring trading gain on derivatives (9% of total revenue), which was partly offset by a loss on the underlying asset reflected in comprehensive income.
The bank’s recurring pre-impairment operating profits were stable in 2013 relative to 2012 and driven by a moderate increase in the loan portfolio (up 4.3% yoy) and larger holdings of fixed income investment securities (over 30%). Growth of earning assets was predominantly funded by customer deposits (up 14% yoy) acquired at lower rates.
The Negative Outlook on the bank’s Long-term IDRs reflects Fitch’s view that the balance of risks remains on the downside given Albanian country risks, as a result of weak domestic growth and deteriorating government finances. A further deterioration in the operating environment and the sovereign credit profile could result in a downgrade of BKT.
A marked deterioration in asset quality or higher risks stemming from related party transactions could also trigger a downgrade.
A stabilisation of the operating environment in Albania could result in the Outlook on BKT’s Long-term IDRs being revised to Stable.
The ratings are as follows:
Foreign currency Long-term IDR: assigned at ‘B’; Outlook Negative
Foreign currency Short-term IDR: assigned at ‘B’
Local currency Long-term IDR: assigned at ‘B’; Outlook Negative
Local currency Short -term IDR: assigned at ‘B’
Viability Rating: assigned at ‘b’
Support Rating: assigned at ‘5’
Support Rating Floor: assigned at ‘No Floor’