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Fitch Affirms Bank Technique at 'CC'

17 May 2013 13:09 (UTC +04:00)

Baku. Vahab Rzayev – APA-Economics. Fitch Ratings has affirmed Azerbaijan-based Bank Technique's (BT, formerly Technikabank) Long-term Issuer Default Rating (IDR) at 'CC'. At the same time the agency has upgraded BT's Viability Rating (VR) to 'cc' from 'f'. A full list of rating actions is at the end of this commentary, APA-Economics reports.

The affirmation of BT's IDR reflects the significant amount of unreserved impaired assets on BT's balance sheet and its weak, albeit slightly improved, capital position. Fitch believes that the bank has achieved only limited progress with its financial recovery following the recognition of significant asset quality problems and sharp deposit outflow in Q212 (see "Fitch Downgrades Technikabank to 'CC'" dated 21 May 2012 at www.fitchratings.com).

The upgrade of BT's VR reflects some limited improvements in its credit profile during the year, including the bank's somewhat more comfortable liquidity position and the expected compliance with regulatory capital requirements following the recent equity injection. At the same time, the low VR continues to reflect the bank's weak asset quality and solvency, weak pre-impairment profitability and low shareholder transparency.

The bank's private shareholders recently provided AZN9m of fresh equity and plan to inject a further AZN5m by end-May 2013. Fitch estimates that if the provisioning level remains unchanged these capital injections will allow BT to become compliant with regulatory capital adequacy ratio (CAR) at end-May 2013 (BT's statutory total CAR was 8.7% at end-Q113, compared to a regulatory minimum of 12%). However, BT's capital will still be insufficient to absorb all loan impairment problems, and internal capital generation capacity is limited, since the bank's reported pre-impairment profit was only marginally above zero in 2012.

At end-2012 BT reported non-performing loans (NPLs; loans 90 days overdue) at 69% of the portfolio in its IFRS accounts (45% of the book was classified as NPLs and impaired, while a further 24% were identified as NPLs but not recognised as impaired). Net of reserves, these NPLs were equal to AZN140m (up from AZN80m at end-2011), or 6.3x IFRS equity. Although BT's management reports that it has managed to recover approximately AZN57m of NPLs in Q113, and expects a further AZN25m of recoveries by end-2013, net NPLs are likely to remain substantial, relative to the bank's equity, in the near term.

At the same time, Fitch acknowledges that BT's liquidity position has improved compared to 2012. BT maintained a cash cushion of AZN79m (equal to 19% liabilities) at end-2012. This compares to potential wholesale repayments in 2013 of AZN5m due to foreign institutions and AZN30m of funding from local banks and government-related institutions. The latter are likely to extend their facilities, in Fitch's view, reducing potential liquidity/refinancing pressure.