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Fitch Rates Pasha Bank ’B+’; Outlook Stable

20 September 2012 10:28 (UTC +04:00)

Baku. Vahab Rzayev - APA-Economics. Fitch Ratings has assigned Azerbaijan-based Pasha Bank (PB) a Long-term Issuer Default Rating (IDR) of ’B+’ with a Stable Outlook.

PB’s IDRs and VR reflect the high-risk Azerbaijan operating environment; the bank’s limited franchise and short track record; potential contingent risks arising from the construction business of the broader group; considerable political risk and uncertainty with respect to the long-term sustainability of the bank’s sizeable related party funding; and significant balance sheet concentrations.

At the same time, the ratings also consider PB’s currently solid financial metrics, reflected in a sizable capital buffer, considerable liquidity cushion and reasonable performance. PB’s credit profile has also benefited to date from the bank’s powerful shareholder in terms of capital injections and access to funding. Reported loans overdue by 90 days or more (non-performing loans, NPLs) stood at 10% of the portfolio at end-2011, which is significant considering recent rapid growth and the relatively unseasoned nature of the book. However, NPLs were 90% covered by loan impairment reserves, and Fitch’s review of PB’s largest exposures suggests their quality is reasonable relative to privately-owned peers.
PB’s loss absorption capacity is currently substantial. At end-Q112, PB could have reserved just over half its loan book without breaching minimum regulatory capital requirements. Fitch estimates that the regulatory capital adequacy ratio of 37% at end-H112 is likely to gradually decrease to around 15% over four to five years, given anticipated 20%-25% annual loan growth rates and current internal capital generating capacity of 10%.
Fitch notes sizeable contingent risks resulting from the shareholder’s construction business, which is viewed by the agency as currently more important for Pasha Holding, than the group’s banking business. Although PB does not finance much of shareholder’s construction activities at present (related party lending was a moderate 15% of end-2011 Fitch core capital), the agency is concerned that PB’s current capital and liquidity buffers could weaken if PB is forced to considerably increase its exposure to related party construction activities. PB’s sister bank, Kapital Bank (’B+’/Stable/’b-’), which is also owned by Pasha Holding, currently has substantial exposure to the group’s construction projects.

Downside pressure on PB’s ratings could arise if the capital and liquidity positions are substantially eroded, for example as a result of very rapid growth or materialisation of contingent risks from other group assets, or if credit underwriting standards and/or asset quality markedly deteriorate. A sharp weakening of the Azerbaijan economy or the country’s political stability, for example in case of a much lower oil price, would also be negative.
Near-term upside potential for PB’s ratings is limited. However, an extended track record of sound performance, greater diversification of the bank’s franchise and improved transparency of the group’s construction business would be credit positive.