November 21, 2017 / 4:41 PM / a year ago

Fitch Upgrades International Bank of Azerbaijan to 'B-'; Outlook Stable

(The following statement was released by the rating agency) MOSCOW, November 21 (Fitch) Fitch Ratings has upgraded Open Joint-Stock Company International Bank of Azerbaijan's (IBA) Long-Term Issuer-Default Rating to 'B-' from 'RD' (Restricted Default). The agency has also upgraded IBA's Viability Rating (VR) to 'ccc' from 'f'. A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS IDRS, VR AND SENIOR DEBT The upgrades of the bank's ratings follow the completion of IBA's debt restructuring on 1 September 2017 and the latest transfer of bad assets off the bank's balance sheet, which Fitch expects to be completed shortly. IBA's VR of 'ccc' reflects the bank's still large exposure to market risks given the bank's sizable unhedged short foreign-currency position. However, the bank's VR benefits from a comfortable liquidity position and currently low-risk asset exposures. The one-notch uplift of IBA's Long-Term IDR of 'B-' relative to the VR of 'ccc' reflects Fitch's view that the probability of the bank defaulting on its senior third-party obligations (which are reference liabilities for bank IDRs) is somewhat lower than it failing (i.e. becoming non-viable, and requiring external support to address a material capital shortfall). This view is supported by the bank's sizable liquidity cushion, the potential for regulatory forbearance from the Central Bank of Azerbaijan (CBA) and the possibility that, in the near term, some form of solvency support may be available from the authorities or quasi-sovereign entities. Fitch has assessed the bank's post-restructuring credit profile based on prudential accounts at end-9M17, preliminary consolidated financial statements according to IFRS at the same date and management representations. At end-9M17, IBA didn't comply with regulatory capital requirements because current year profits, which include most of the gains from the debt restructuring and bad assets transfer, are recognised as Tier 2 capital until the end of the year, and also investments in subsidiary banks are deducted from total capital. Adjusting capital ratios for current year results and assuming that the bad asset transfers are completed in 4Q17, Fitch estimates that end-2017 Tier 1 capital ratio could be close to 20%. Based on the preliminary IFRS accounts, Fitch estimates IBA's Fitch Core Capital (FCC) ratio at around 11% at end-9M17. However, IFRS equity in these accounts (AZN392 million) is understated by around AZN300 million (management's estimation), as the new USD1 billion Eurobond, issued in exchange for the bank's restructured obligations, has not yet been restated at fair value based on its low (3.5%) coupon. Recognising this gain would improve the FCC ratio by an additional 9 ppts. Adjusting also for the 4Q17 gains on the bad loans transfers could result in a FCC ratio of up to a high 30%. However, Fitch still views the bank's capital position as vulnerable due to the large unhedged short foreign-currency position of AZN3.6 billion (9x Tier 1 regulatory capital adjusted for current year profit and gains on the loan sales). Management intends to close the currency position during the next few months via a hedging arrangement with Ministry of Finance and/or conversion of its manat deposits with the CBA into US dollars. However, in Fitch's view there is uncertainty about where these transactions will take place and the terms of any hedges. IBA's asset quality has significantly improved during the last 12 months due to the further transfers of bad assets. According to regulatory accounts, the bank's net loan book has contracted to AZN1.8 billion at end-9M17 (24% of total assets), of which around AZN300 million is to be transferred in 4Q17. Remaining loans are of adequate quality, comprising primarily exposures to retail customers and state-owned corporates. Other assets are mainly represented by low-risk local currency deposits placed with CBA (AZN2.9 billion, 38% of total assets at end-9M17) and current accounts with highly rated foreign banks (a further AZN1.6 billion equivalent, 21%). At end-9M17, IBA's liquidity position was comfortable, with liquid assets (mainly, cash and cash equivalents and placements with CBA and foreign banks) covering over 100% of customer accounts. Foreign currency liquidity is also comfortable given a sizable share of liquid assets placed in foreign banks, and the long-term nature of most wholesale funding. As a result of the debt restructuring, the bank has issued a new USD1 billion Eurobond, which is held mostly by the State Oil Fund of Azerbaijan Republic, Fitch understands from management. The issue is rated long-term 'B-', in line with the bank's Long-Term IDR, reflecting Fitch's view of average recovery prospects, in case of default. SUPPORT RATING AND SUPPORT RATING FLOOR The affirmation of the Support Rating of' 5' and Support Rating Floor of 'No Floor' reflects Fitch's view that support from the shareholder, the Azerbaijan sovereign (BB+/Negative), cannot be relied upon in the long term following the bank's recent default. However, in Fitch's view some form of forbearance or support may be made available to the bank in the near term to avoid a repeat default on third-party senior obligations, should its capital be depleted by losses resulting from its FX position. RATING SENSITIVITIES IBA's VR could be upgraded if the bank is able to hedge its open foreign currency position and if the hedge is viewed by Fitch as effective and reliable. Conversely, if the bank fails to close its currency position and incurs losses as a result of manat depreciation against the US dollar, then the VR may be downgraded, potentially to 'f' to reflect a material capital shortfall. IBA's Long-Term IDR will probably become aligned with the bank's VR if the latter is upgraded. If the VR is downgraded then the Long-Term IDR will likely be affirmed at 'B-', unless Fitch believes there is a real possibility of losses being imposed on third-party senior creditor to restore the bank's solvency. Positive rating action on the bank's Support Rating and Support Rating Floor is unlikely in the near term given the bank's recent default. The rating actions are as follows: Open Joint Stock Company International Bank of Azerbaijan Long-Term IDR: upgraded to 'B-' from 'RD', Outlook Stable Short-Term IDR: upgraded to 'B' from 'RD' Viability Rating: upgraded to 'ccc' from 'f' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: assigned at 'B-'; Recovery Rating 'RR4' Contact: Primary Analyst Ruslan Bulatov Associate Director +7 495 956 9982 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analyst Alexander Danilov Senior Director +7 495 956 2408 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on 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. 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