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Fitch assigns Azerbaijanâ€™s AtaBank a rating of â€™B-â€™ with stable outlook

03 November 2012 07:46 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. Fitch Ratings has assigned Azerbaijan-based AtaBank (AB) a Long-term Issuer Default Rating (IDR) of â€™B-â€™ with a Stable Outlook.

The Agencyâ€™s rating actions are as follows: Long-term foreign-currency IDR: assigned â€™B-â€™; Outlook Stable; Short-term foreign-currency IDR: assigned â€™Bâ€™; Viability Rating: assigned â€™b-â€™; Support Rating: assigned â€™5â€™; Support Rating Floor: assigned â€™No Floorâ€™.

In Fitchâ€™s views, ABâ€™s IDRs and VR reflect its vulnerable asset quality resulting from Azerbaijanâ€™s high-risk operating environment, its limited loss absorption capacity, moderate liquidity and concentrated franchise.

Support from the bankâ€™s shareholders has not been factored into the ratings, although Fitch considers the bankâ€™s close connections to the Azerbaijan authorities as mildly positive for creditors. At the same, direct assistance from the Azerbaijan authorities cannot be relied upon at all times, in Fitchâ€™s view, due to ABâ€™s limited systemic importance (just 1.6% of sector assets at end-2011), and the poor track record of state support even for the largest bank in the country, state-owned International Bank of Azerbaijan (â€™BB+â€™/RWN).

By end of 1st half of 2012 (end-H112) ABâ€™s statutory capital adequacy ratio was 13.3%, which Fitch regards as tight, particularly in light of the bankâ€™s concentrated loan book (with the top 25 exposures equal to 2.2x Fitch core capital, FCC) and notable level of unreserved problem assets. Impaired loans amounted to 6.2% of the gross portfolio at end-H112 and were only 29% covered by loan impairment reserves (LIRs), with the unreserved portion equal to 19% of FCC. Fitch has additional concerns about two interbank loans (further 28% of FCC), which are non-performing or potentially problematic. Fitch estimated that AB had the ability to increase its LIR only to 4.5% of gross loans (73% of NPLs) or to cover 70% of the abovementioned interbank exposures at end-H112 before its capital adequacy ratio would have hit the regulatory 12% minimum.

ABâ€™s internal capital generation has been hampered by weak operating efficiency, and the bankâ€™s net interest margin has been below the peer average (albeit partly as a result of participation in projects financed by the National Fund for Support of Entrepreneurship), potentially indicating that the proportion of related party lending could be much higher than the reported 11.6% of the loan book at end-2011.

Absent of sufficient capital generation capacity, AB depends on timely capital injections from shareholders to support growth. The bank indicated that a new equity injection will most likely take place by the end of 2012, in preparation for compliance with the new minimum AZN50m regulatory capital requirement (effective from 1 January 2014).

By the end of first 7 months of 2012 ABâ€™s total available liquidity covered just 16% of its total customer accounts, which Fitch regards as quite modest in light of ABâ€™s rather concentrated funding base (the top 20 depositors accounted for 58% of total customer funding). At the same time, the bank had no wholesale refinancing needs, and funding diversification is to be targeted through utilisation of the bankâ€™s branch network (the fifth-largest in Azerbaijan).

Downside pressure on ABâ€™s ratings could arise if there was intensified pressure on capital, in particular as a result of credit impairment, or insufficient equity injections. A severe weakening of the Azerbaijan economy or the countryâ€™s political stability, for example in case of a much lower oil price, would also be negative.

Near-term upside potential for ABâ€™s ratings is limited. However, strengthening of the bankâ€™s capital, improvements in profitability metrics and reasonable expansion of the bankâ€™s franchise would be credit positive.

The Support Rating and SRF could be upgraded if there is a marked increase in ABâ€™s systemic importance and the depth of its franchise, or if the Azerbaijan authorities more clearly demonstrate their readiness to support the countryâ€™s non state-owned banks. However, Fitch views such changes as unlikely in the near term.