Finance

Finance

Fitch Downgrades International Bank of Azerbaijan to ’BB+’

15 December 2011 13:25 (UTC +04:00)

Baku â€“ APA-Economics. Fitch Ratings has downgraded International Bank of Azerbaijan’s (IBA) Long-term Issuer Default Rating (IDR) to ’BB+’ from ’BBB-’ and Support Rating to ’3’ from ’2’, Cbonds reported.

The Support Rating Floor has been revised to ’BBB-’ from ’BB+’. All ratings have been maintained on Rating Watch Negative (RWN). A full list of rating actions is at the end of this commentary.

The downgrades reflect further delays with IBA’s recapitalisation, and that continued non-compliance with regulatory capital ratios has forced the bank to seek waivers from creditors in respect of covenant breaches. In Fitch’s view, the absence of timely capital support over a prolonged period of time means that it is no longer appropriate for the bank’s ratings to be at investment grade level.

At the same time, Fitch’s base case expectation remains that the Azerbaijan authorities will ultimately provide necessary support to IBA, and the ’BB+’ Long-term IDR continues to reflect a relatively high likelihood of assistance from the Azerbaijan sovereign (’BBB-’/Positive). However, the RWN on the ratings reflects the significant risk of a another downgrade if there is a further delay with the recapitalisation, particularly if this extends beyond the current waiver period granted by creditors and results in an acceleration of the bank’s debt.

IBA has been in breach of minimum capital adequacy requirements since the beginning of 2010, but the Azerbaijan authorities have only recently formulated plans to recapitalise the bank. Furthermore, Fitch understands that capital will be replenished in the first instance only by subordinated debt, which will be classified as Tier 1 capital for regulatory purposes, but provides less financial flexibility and loss-absorption capacity than equity. Fitch has been informed that the authorities also plan to inject equity into the bank, but this will be an incremental process and will depend on minority shareholders being able to contribute on a pro rata basis.

Fitch has also been informed that the Central Bank of Azerbaijan (CBA) has now committed to provide subordinated debt to IBA by end-2011, although previously this was scheduled to take place by end-October 2011. If the facility is not provided by 15 January 2012, then Fitch understands that the waiver granted by creditors will lose force and lenders would once more be able to accelerate funding equal to about 8% of the bank’s liabilities. Even if the facility is provided, by itself it is unlikely to be sufficient to bring the bank’s Basel capital ratios into line with covenanted levels; meaning a further covenant breach is likely when the bank’s end-2011 IFRS accounts are published.

IBA’s support-driven ratings continue to factor in the bank’s dominant market shares and systemic importance, its part policy role, and its relatively small size compared to the sovereign’s available resources. However, the recapitalisation delays, the large (49.8%) minority non-government ownership of IBA - which, in Fitch’s view, could be a factor contributing to delays with equity injections - and the potential privatisation of the bank limit the extent to which support is factored into the ratings.

Fitch will likely affirm the bank’s IDRs if the Azerbaijan authorities complete the planned recapitalisation of the bank. However, IBA could be downgraded further if there are further delays with implementation of these plans, in particular if they result in debt acceleration.