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Fitch Affirms IBA and Pasha Bank; Downgrades AccessBank on Sovereign Action
March 9, 2016 / 6:28 PM / a year ago

Fitch Affirms IBA and Pasha Bank; Downgrades AccessBank on Sovereign Action

(The following statement was released by the rating agency) MOSCOW, March 09 (Fitch) Fitch Ratings has affirmed International Bank of Azerbaijan's (IBA) and Pasha Bank's Long-term Issuer Default Ratings (IDRs) at 'BB' and 'BB-', respectively. The agency has also downgraded the Long-term IDR of Azerbaijan's AccessBank (AB) to 'BB+' from 'BBB-'. The Outlooks on all three banks are Negative. A full list of rating actions is available at the end of this commentary. The rating action follows the downgrade of Azerbaijan's IDRs and Country Ceiling (see "Fitch Downgrades Azerbaijan to 'BB+'; Outlook Negative" dated 26 February 2016 on KEY RATING DRIVERS IBA The affirmation of IBA's Support Rating Floor (SRF) and Long-term IDR at 'BB' balances the weaker ability of the authorities to provide support to the bank, as reflected by the sovereign downgrade with Fitch's view of a now stronger propensity of the authorities to support, due to a considerable improvement in the support track record. The latter is reflected in (i) the AZN3bn clean-up of IBA's balance-sheet, executed through buy-outs of impaired loans, which was finalised in January 2016; and (ii) a planned AZN500m equity injection, which will support IBA's solvency and also increase the Ministry of Finance's stake in the bank to above 80%, from 51.1% at present. Fitch's view of the improved propensity to support has resulted in a reduction, to one notch from two, in the difference between IBA's and the sovereign's Long-term IDRs. IBA's Long-term IDR has been removed from Rating Watch Positive (RWP). The RWP had reflected the potential for IBA to be upgraded if the problem loan buy-out was completed and the sovereign rating remained at its previous level. (See "Fitch Keeps IBA on RWP; Takes Negative Action on 4 Other Azerbaijani Banks" dated 24 December 2015 at However, the sovereign downgrade meant that the RWP was removed without an upgrade of IBA. IBA's IDRs, SRF and the Support Rating of '3' continue to reflect Fitch's view of a moderate probability of support from the Azerbaijani authorities. In assessing the propensity, Fitch views favourably, in addition to the improved track record, the following factors: (i) IBA's high systemic importance, stemming from its dominant market shares (the bank accounts for 35% of sector assets) and substantial funding from state-owned entities (around AZN1.5bn or 15% of end-1H15 liabilities); (ii) the bank's majority state ownership; (iii) IBA's fairly small size relative to the sovereign's available resources (IBA's equity and assets equalled to less than 2% and 25% of GDP at end-2015, respectively); and (iv) the potentially significant reputational damage for the authorities in case of IBA's default. The one notch differential between the sovereign and bank ratings reflects (i) the still short track record of significant support for the bank after a more extended period when sufficient support was not forthcoming; (ii) moderate risk that, in case of extreme sovereign stress, the authorities would cease to provide full support to IBA and other quasi-sovereign entities ahead of a sovereign default; and (iii) the authorities' stated intention to ultimately privatise the bank. The affirmation of IBA's 'b-' Viability Rating (VR) reflects (i) IBA's fragile asset quality which, despite the AZN3bn problem loan buy-out, will remain under pressure from high loan dollarisation (60% at end-2015) and still significant volumes of higher-risk asset exposures; (ii) a still rather weak core capital position, although this should be moderately strengthened by the expected AZN500m equity injection; (iii) weak profitability; and (iv) high near-term refinancing risks, although planned capital support may improve IBA's liquidity position. Although IBA's non-performing loans (NPLs, 90 days overdue) comprised a moderate 7% of end-2015 gross loans, Fitch views underlying asset quality as vulnerable, at least based on a review of IBA's largest loans. These loans remain concentrated (the 20 largest loan exposures equalled 3.8x regulatory capital at end-2015) and high-risk. The risk of these loans stems from (i) the generally long tenors/grace periods on principal repayments; (ii) significant project finance exposures; and (iii) considerable exposures to construction and real estate. In addition to the largest loans, IBA's sizable exposure (AZN3bn or 3.4x regulatory capital) mostly to start-ups/uncompleted real estate projects in Russia, represents an additional drag on asset quality. Positively, according to management, IBA is discussing with the authorities possible further problem asset buy-outs on top of the AZN3bn already completed. Fitch estimates IBA's Fitch Core Capital (FCC) ratio at end-2015 at approximately 6%, as the positive (balance sheet reduction) effect of the AZN3bn asset transfer was largely offset by the devaluation of the manat in 4Q15, which resulted in significant inflation of IBA's FX-denominated assets. FCC may increase to about 10% after the expected AZN500m equity injection, assuming only moderate new loan issuance, but could be further boosted in case of an additional problem asset buy-out. Internal capital-generating capacity is weak due to narrow margins, a high cost base and elevated loan impairments. Fitch does not expect IBA's profitability to improve in the near-term. IBA's near-term refinancing needs are significant. According to management, IBA's refinancing needs for the year amounted to around AZN1.2bn at end-February 2016, while the liquidity buffer was only AZN0.6bn. However, the equity injection should - and cash receipts from any further loan sale could - support the bank's liquidity position. Funding from corporate clients (33% of end-2015 liabilities) is fairly sticky, but IBA faced a moderate 5%-10% retail funding outflow in December 2015-January 2016. Funding dollarisation was a high 80% at end-2015 and IBA's short USD balance sheet position was around 1x regulatory capital. According to management, this was fully hedged with the Central Bank of Azerbaijan and other counterparties, so IBA's bottom-line is protected from one-off translation losses in case of further AZN devaluation. AB The downgrade of AB's Long-term IDR to 'BB+' from 'BBB-' and Support Rating to '3' from '2' reflects the revision of Azerbaijan's Country Ceiling to 'BB+' from 'BBB-'. This in turn reflects Fitch's view of an increase in transfer and convertibility risks - in line with the weakening of the sovereign credit profile - which could constrain the ability of AB to utilise support from its International Financial Institution (IFI) shareholders to service its foreign currency obligations. Fitch continues to view the propensity of the IFIs to provide support to AB as high. The support considerations take into account (i) the IFIs' strategic commitment to microfinance lending in developing markets; (ii) the IFIs' direct ownership of AB, stemming from their participation as founding shareholders; (iii) the significant integration of IFI guidelines into AB's risk management; and (iv) Fitch's expectation that a full exit of the IFIs from the bank in the next few years is unlikely. The Negative Outlook on AB's IDRs reflects that on the sovereign. The affirmation of AB's VR of 'bb-' reflects the bank's still solid intrinsic creditworthiness in the highly cyclical and oil-dependent Azerbaijani economy. The VR continues to factor in AB's adequate asset quality, driven by robust underwriting standards and risk controls, strong bottom-line performance, comfortable capital position and the sound quality of management. However, Fitch expects AB's financial profile to deteriorate over the next 12-18 months, which is likely to exert downward pressure on the VR. At end-2015, AB's loans 30 days overdue surged to 7.4% of gross loans from 0.8% at end-2014. Restructured loans also increased sharply to 28% from 0.5% at end-2014. According to management, most of the restructured loans are FX-denominated loans, where AB has extended maturities and reduced interest rates so that monthly instalments for borrowers in manat terms are unchanged following the devaluation. Helping to mitigate the asset quality risks is rather granular and mostly secured profile of the loan portfolio so that at least moderate recoveries from overdue loans are likely. However, pressure on asset quality may intensify in 2016, due to high loan dollarisation in AB (70% of its gross loans) and the ongoing slowdown of the economy. AB's loss absorption capacity is significant, as expressed by its high 17% FCC ratio at end-2015. Fitch estimates that AB's regulatory capital buffer is sufficient to withstand 8% of additional credit losses. AB's robust pre-impairment profit in 2015 was equal to 5.5% of loans, also supporting the bank's loss absorption capacity. Near-term refinancing needs are significant, at around 30% of end-2015 liabilities, but the available liquidity cushion at end-2015 (including committed credit lines of USD72m from IFIs) was equal to 90% of maturing facilities. Refinancing risks are partially reduced by rapid loan turnover and access to parent funding. PB PB's IDRs, SR and SRF are underpinned by the potential support available to the bank from the Azerbaijan authorities, in case of need. Fitch's view on support takes into account: (i) the combined market shares of PB and its sister Kapital Bank (KB) in considering systemic importance, as they are part of a single group; (ii) the somewhat improved track record of sovereign support for the banking sector in light of the ongoing financial rehabilitation of IBA; and (iii) the benefits of the banks being ultimately owned by a structure closely connected to the Azerbaijani authorities, which at least in the near term should make support more likely, in Fitch's view. PB and KB, which are both owned by Pasha Holding, at end-1H15 had combined market shares of 14.1% in deposits (6% KB; 8.1% PB) and 8.8% of loans (5.6% KB, 3.2% PB), making them comfortably the second-largest banking group in Azerbaijan after IBA. In Fitch's view, any sovereign support would likely be available to both of the banks, in case of need, rather than one of the institutions in isolation. The Outlook on PB's IDR has been revised to Negative from Stable to mirror that on the sovereign, while the differential between the sovereign and bank ratings has narrowed to two notches from three. The reduction in the rating differential reflects (i) the improved recent track record of government support, given the assistance to IBA (PB and KB themselves have not needed support during the recent downturn); (ii) Fitch's view that the propensity to provide support to PB remains strong, while the ability of the sovereign to support has only reduced moderately given the small size of PB and KB (combined balance sheets equal to just 6% of GDP); and (iii) usually somewhat smaller notching at lower rating levels between sovereign ratings and bank Support Rating Floors, in accordance with Fitch's bank rating criteria. KEY RATING DRIVERS AND SENSITIVITIES IBA MOSCOW The expected rating of IBA Moscow's senior debt issues is equalised with that of its parent IBA. This reflects IBA's offer to purchase the bonds in case of a default by IBA Moscow, which represents an irrevocable undertaking and ranks equally with IBA's other senior unsecured obligations. IBA Moscow's senior unsecured debt rating is likely to move in tandem with IBA's senior debt rating. RATING SENSITIVITIES IDRS, SRs AND SRFs The Negative Outlooks on all three banks reflect that on the sovereign. Accordingly, the support-driven IDRs on each of the banks will likely be downgraded in case of the sovereign being downgraded and the Country Ceiling lowered. Conversely, a revision of the Outlook on the sovereign to Stable will likely result in a similar action on the banks. Downside pressure on the banks' IDRs could also result from a potential weakening of the support stance of the sovereign (for IBA and Pasha) or IFI shareholders (for AB), although Fitch views this as unlikely in the near-term. Upside rating potential for PB and IBA, implying a reduction of the notching between the banks' ratings and that of the sovereign, is limited at the moment. However, further improvements in the track record of sovereign support for the banking sector as a whole, and IBA in particular, would be credit-positive. IBA's AND AB's VRS IBA's VR could be upgraded if the positive impact on its credit profile from the planned capital support and potential additional problem asset transfer is sufficient to materially improve the bank's solvency and is not offset by renewed asset quality pressure. Downside pressure on IBA's VR could result from a further intensification of asset quality and refinancing pressures. AB's VR could be downgraded if further loan impairment materially erodes its profitability and eats into capital. AB's VR may be affirmed if asset quality pressure reduces. Upside potential for AB's VR is limited and would require an improvement in the broader economic environment. The rating actions are as follows: IBA Long-term foreign currency IDR: affirmed at 'BB'; off RWP; Outlook Negative Short-term foreign currency IDR: affirmed at 'B' Viability Rating: affirmed at 'b-', off Rating Watch Evolving Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB', off RWP Senior unsecured debt: affirmed at 'BB', off RWP IBA-Moscow Senior unsecured debt: affirmed at 'BB(EXP)', off RWP AccessBank Long-term IDR: downgraded to 'BB+' from 'BBB-'; Outlook Negative Short-term IDR: downgraded to 'B' from 'F3' Viability Rating: affirmed at 'bb-' Support Rating: downgraded to '3' from '2' Pasha Bank Long-term foreign-currency IDR: affirmed at 'BB-'; Outlook revised to Negative from Stable Short-term foreign-currency IDR: affirmed at 'B' Viability Rating: 'b+'; unaffected Support Rating: affirmed at '3' Support Rating Floor: affirmed at 'BB-' Contact: Primary Analyst Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Secondary Analysts Ruslan Bulatov (IBA, AB) Associate Director +7 495 956 9982 Maria Kuraeva (PB) Associate Director +7 495 956 5575 Committee Chairperson Olga Ignatieva Senior Director +7 495 956 6906 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 20 Mar 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1000665 Solicitation Status here Endorsement Policy here ail=31 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 WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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