December 18, 2017 / 3:10 PM / a year ago

Fitch Revises Crown Agents' Outlook to Stable; Affirms at 'BB'

(The following statement was released by the rating agency) LONDON, December 18 (Fitch) Fitch Ratings has revised Crown Agents Bank Limited's (CABK) Outlook to Stable from Evolving, while affirming the bank's Long-Term Issuer Default Rating (IDR) at 'BB'. Fitch has also affirmed CABK's Short-Term IDR at 'B', Viability Rating (VR) at 'bb' and Support Rating at '5'. KEY RATING DRIVERS IDRS AND VR The Outlook revision reflects progress made by CABK in implementing its new strategy since its acquisition by Helios Investment Partners LLP (Helios) in March 2016, which involves a significant increase in the scale of its business model. The Outlook revision also reflects more definitive strategic objectives and reduced likely volatility in the bank's business profile. A still limited record of implementation of its expansion strategy and a small capital base are balanced by an established, but somewhat concentrated, deposit franchise and low-risk and liquid balance sheet. Fitch understands from management that the bank will maintain a high proportion of liquid assets over the medium term. CABK's management has scaled back its medium-term growth plans since a year ago, when it was targeting a more than doubling of the balance sheet by end-2021. However, growth targets remain material, and the latest management forecasts signal that the balance sheet will grow by 50% from end-2016 to end-2019. The targeted growth is part of CABK's aim to become a major transactional bank between developed and emerging market counterparties, providing payments, foreign exchange, treasury services and trade finance for non-governmental organisations, local banks and non-bank counterparties. The bank's balance sheet is likely to remain deposit-driven, and revenue will continue to be dominated by foreign exchange and money market income and payment services. As part of the targeted business model, the bank will also gradually expand its trade finance activity, including increasing its on-balance sheet trade finance exposure. However, we understand from management that trade finance will not be a primary focus for the bank and will form only a small portion (less than 5%) of total assets; most trade finance exposure will be off-balance sheet and either cash-collateralised or covered by World Bank or UK Export Finance guarantees. Establishing strong, experienced and well-functioning risk management and operational teams, technology and processes will be key to handling a growing flow of small transactions sufficiently. Fitch believes that if successfully implemented, the expansion will help bring some diversification to the business and improve structural profitability in the medium term. Earnings have improved in 2017 and we expect profitability to strengthen to adequate levels in the medium term, assuming successful strategic implementation. CABK expects to break even in 2017 although short-term internal capital generation will likely remain modest. CABK's capital base grew to GBP42 million at end-2016 (2015: GBP27 million) on injections from the owner; further injections in 2017 helped capital to grow to GBP58 million to date. However, the capital base remains small in absolute terms and therefore offers little protection for creditors in our view, and we believe that the additional capital injections only partly mitigate the possibility of increased operational risk as part of the expansion plans. The bank has invested in strengthening internal controls and capabilities to meet its targeted growth, as well as planning further investments in digitalisation and to expand its payments functionality. We believe that these investments have helped to strengthen CABK's internal control environment although the lack of track record of these under a significantly higher volume business model is a constraint on the rating. High concentrations on both sides of the balance sheet are also negative rating considerations. CABK's franchise is niche given its business focus but the business is supported by the bank's long-standing relationship network and brand recognition with clients in targeted regions. As part of its expansion the bank has increased its risk appetite moderately, albeit from conservative levels. Historically, CABK has had a conservative appetite for credit risk as its business model concentrated on disbursing aid to developing countries while holding funds for various local and central banks in the form of short-term highly-rated assets. Although CABK's role as a depositor bank is expected to remain a fundamental part of the updated strategy, Fitch believes that given the weak profitability of this business, its importance will gradually reduce as the business model evolves. The expansion of trade finance activity should be mitigated by the bank's planned low-risk underwriting standards as well as the low-risk nature of the bulk of the targeted asset base, comprising certificates of deposit, money market exposures and high-quality liquid assets held with highly-rated counterparties. The bank will also continue to be exposed to settlement arising from its FX transactions with its core African market, although we believe the risk is manageable due to fairly conservative exposure limits that will curb potential losses. CABK's Short-Term IDR of 'B' is based on the bank's Long-Term IDR of 'BB' and reflects the mapping relationship between Long- and Short-Term IDRs as outlined in Fitch's Global Bank Rating Criteria. SUPPORT RATING Fitch views CABK's owner as the most likely source of support for the bank. However, we believe that such support, while possible, cannot be relied upon, mainly because the agency views the owner as a financial, rather than strategic, investor. This is reflected in our Support Rating of '5'. RATING SENSITIVITIES IDRS AND VR Fitch expects less downside risk to the bank's business model as its expansion continues, which is reflected in the Outlook revision. CABK's ratings are primarily sensitive to the bank's ability to continue to successfully implement its planned expansion. If CABK operates at its targeted larger scale, expanding its customer franchise, while improving profitability and internal capital generation, strengthening risk controls and maintaining sound asset quality and liquidity, then this would likely be positive for the ratings. Conversely, negative pressure on the ratings could arise if the bank falls significantly behind its medium-term targets, such as below-target revenue growth resulting in ongoing weak internal capital generation that is insufficient to offset the higher cost base, or if material impairment or operational charges transpire. A downgrade would also be possible if the bank adopts a more aggressive risk appetite than our current expectations or if it materially tightens its liquidity. SUPPORT RATING Any change in CABK's Support Rating would require a change in Fitch's assessment of the owner's ability or propensity to provide extraordinary support. Contact: Primary Analyst Krista Davies Director +44 203 530 1579 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Marc Ellsmore Associate Director +44 203 530 1438 Committee Chairperson Bridget Gandy Managing Director +44 203 530 1095 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy 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 WEB SITE AT WWW.FITCHRATINGS.COM. 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