Fitch Ratings: UniBank’s NPL level reaches 8% while loan impairment reserve insufficient to cover losses

 Fitch Ratings: UniBank’s NPL level reaches 8% while loan impairment reserve insufficient to cover losses
# 18 December 2008 10:33 (UTC +04:00)
The rating affirmation reflects Fitch’s current opinion that, although both liquidity and asset quality have deteriorated in recent months, these at present remain consistent with a ‘B-’ (B minus) rating, particularly in light of the bank’s near-term funding and capital-raising plans. However, credit risk remains high as a result of recent very rapid growth and a challenging operating environment, while the bank’s high reliance on foreign funding makes the liquidity position potentially vulnerable. Any further significant weakening of liquidity or asset quality in the upcoming months could still result in negative rating action.
UB’s liquidity position has come under considerable pressure due to its high reliance on short-term wholesale foreign funding, a significant part of which has been repaid in Q408, with much of the remainder falling due in H109. As at 13 December 2008, Fitch estimates that the bank held approximately AZN51m of liquid assets, while borrowings from foreign commercial creditors falling due by end-H109 were around AZM62m and total customer deposits were AZN155m. However, Fitch understands that the European Bank for Reconstruction and Development (EBRD), a minority shareholder, may provide significant funding to help refinance the upcoming foreign debt and also roll over the majority of funds due to it in H109. Fitch also notes that the National Bank of Azerbaijan has already provided a AZN50m six-month loan (falling due in Q209, but with a six month roll-over option) to UB to help with refinancing, and may provide further funding, if required. The AZN15m equity injection planned for Q109 would also improve liquidity. However, the liquidity position remains potentially vulnerable and is, to a large extent, dependent on the stability of customer funding, around 40% (AZN64m) of which as at 13 December was on demand or had a maturity of less than one month.
UB’s asset quality has deteriorated significantly since end-Q108, as a loan book which grew rapidly in 2007 has gradually seasoned. The level of non- performing loans (NPLs), defined as more than 90 days overdue (including principal and interest), grew to AZN24m at end-November 2008 or 8% of the loan book, up from AZN18.2m at end-Q308, AZN14.8m at end-H108 and AZN4.6m at end- Q108. Although NPLs appear to be reasonably secured, the created loan impairment reserve (AZN18.2m at end-11M08) may not be sufficient to cover all future losses. Fitch also notes that NPLs could continue to rise and be significant relative to capital as the loan book continues to season, while Azerbaijan’s economy is likely to be negatively affected by the significant decline in global oil prices.
UB’s capitalisation in 2008 was supported by retained earnings and a subordinated loan. At end-11M08, the bank’s regulatory tier 1 and total capital ratios stood at 8.1% and 15.1%, respectively; however, Fitch estimates that the tier 1 ratio would have been about 11.5% if current year earnings were included. Given the increased share of NPLs in the loan book and the challenging economic environment, Fitch regards UB’s capitalisation as weak. However, a planned Q109 AZN15m equity injection (equal to about 32% of end-11M08 equity) would provide some support, and Fitch notes that significant further growth of risk-weighted assets is unlikely given the funding and liquidity challenges faced.
Last week Moody’s Investors Service lowered the outlook on the B2 long-term foreign and local currency deposit ratings of Azerbaijan-based UniBank to ‘negative’ from ‘positive’.
Moody’s said the decision to change Unibank’s outlook to ‘negative’ reflects weakening liquidity position and increased refinancing risk faced by the bank.
The negative outlook also reflects concerns about Unibank’s ability to refinance its debt obligations without having significant reduction in its business activity.
UB is the second-largest private bank in Azerbaijan, holding 5% of system assets and 5% of retail deposits at end-Q308. The bank is a market leader in auto and mortgage lending.
As at October 1, UniBank’s assets at AZN 467.235 million, loan portfolio at AZN 347.932 million, deposit portfolio at AZN 111.902 million, total capital at AZN 64.129 million and share capital at AZN 15 million.
UniBank is owned by the EBRD (15.15%), DEG Investment Corporation (8.33%), legal entities (0.9%) and individuals (75.62%).