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Azerbaijanâ€™s AGBank receives ratings from Fitch Ratings

26 November 2008 12:29 (UTC +04:00)

Baku. Vahab Rzayev â€“ APA-Economics. Fitch Ratings-London/Moscow- 25 November 2008: Fitch Ratings has today assigned Azerbaijani-based AGBankâ€™s (AGB) a Long-term foreign currency Issuer Default rating (IDR) of â€˜B-â€˜(B minus), short-term foreign currency IDR: ’B’, support rating: ’5’, individual rating: ’D/E’, support Rating Floor: â€œNo Floorâ€. Ratings carry stable outlook.
The ratings take into account the bankâ€™s small size by international standards, considerable loan book and deposit base concentrations, potentially vulnerable liquidity, risks arising from rapid recent growth, weak capitalisation and weaknesses in the operating environment. The ratings also reflect AGBâ€™s reasonable current reported asset quality and relative deposit stability to date, as well as potential support for funding and governance from the minority ownership of the International Finance Corporation (IFC).
Near-term liquidity risk is significant. At end-Q308, 18% of the bankâ€™s liabilities were attracted from international counterparties. However, almost half of this (or 8% of liabilities) relates to a large deposit from a single international bank, due January 2009, which makes liquidity potentially vulnerable. Nonetheless, the relative stability, to date, of customer funding, and a short-term loan book partly mitigate liquidity risk. The successful completion of negotiations with the IFC to receive a USD15m subordinated loan with up to 10 year tenor could strengthen AGBâ€™s liquidity position.
AGBâ€™s capitalisation in 2008 was supported by an equity injection and retained earnings. At end-Q308 the bankâ€™s regulatory tier 1 and total capital ratios stood at 12.4 and 15.1%, respectively, with Fitchâ€™s Eligible Capital ratio standing at 14.3% (tier 2 capital comprises mainly current year earnings and general reserves). Given the weaknesses in the operating environment, rapid asset growth, low free capital and significant concentrations on the balance sheet, Fitch regards AGBâ€™s capitalisation as weak.
In recent years, the share of non-performing loans (NPLs) in the portfolio, defined as more than 90 days overdue, has been declining, albeit the reduction has in part been due to loan book expansion, and NPLs remain significant, at 3.1% of the gross loan book at end-Q308. As the bank informed Fitch, by mid-November 2008 some of these impairments were recovered. Although the loan book is well secured and loan impairment reserve coverage is adequate relative to current impairment, in Fitchâ€™s view, additional losses could be significant relative to capital as the portfolio seasons in a deteriorating environment.
Downward pressure on the ratings could materialise if the bankâ€™s liquidity or asset quality weakens substantially. Upside pressure is unlikely in the mid term, due to significant weaknesses in the bankâ€™s credit profile and uncertainty on how the global recession is likely to impact Azerbaijanâ€™s economy.
AGB is the 10th largest bank in Azerbaijan by assets, focusing on SME lending. At end-Q308 the bank had a 2% market share in system assets and 5% in retail deposits. As Fitch understands, the bank is controlled by two individuals: Chingiz Asadullaev (a member of Azerbaijanâ€™s parliament and chairman of the supervisory board of the Azerbaijani Deposit Insurance Fund), with a 25.3% stake, and Farzulla Yusifov, with a 22.4% stake. The other large shareholders are IFC (17.5% stake) and Kazimir Partners (10%).