Baku, Azerbaijan, Mar.11
By Azad Hasanli - Trend:
Fitch Ratings has affirmed the Long-term foreign currency Issuer Default Ratings (IDRs) of Azerbaijan-based Unibank, DemirBank and Express Bank at 'B' and AtaBank at 'B-', said the message of Fitch Ratings, the international rating agency Mar.11.
The Outlooks on all four banks are Stable.
"The affirmations of Unibank, DemirBank, Express Bank and AtaBank reflect the so far only moderate deterioration of the banks' credit profiles amid the weakening operating environment driven by the sharp drop in oil prices, and limited direct impact from the recent 34 percent local currency devaluation due to moderate open short FX positions and/or sufficient capital buffers to absorb the shock," said the message.
Fitch has revised the Outlooks on Unibank and DemirBank to Stable from Positive, as the more challenging environment may exert pressure on asset quality and profitability, especially considering significant dollarisation of balance sheets. This will likely offset recent improvements in franchise and pre-impairment profitability, which have been particularly evident at Unibank.
"Unibank's and DemirBank's capital ratios of 16.5 percent and 15.9 percent, respectively, at end-2014 could have declined by about up to 3 percentage points as a result of devaluation, but would have remained above the regulatory minimum, according to Fitch's estimates," the report said.
The banks' short on-balance sheet open foreign currency positions were below 25 percent of equity as at devaluation date, so the direct impact from FX losses was probably just over 1 percentage point, while a close to 2 percentage points decrease could have resulted from inflation of risk-weighted assets, as around 35 percent of the banks' total assets were in US dollars, said the analysts of the agency.
AtaBank benefited from substantial long open balance-sheet foreign currency position as at devaluation date offsetting the impact from inflation of risk-weighted assets, while Expressbank's open currency position was negligible and balance sheet dollarisation was limited to only moderate 13 percent, according to Fitch's estimates. Consequently both banks' capital positions (total ratios of 16.2 percent and 44.5 percent, respectively, at end-2014) are likely to have proved more resilient.
"Asset quality is reasonable at Unibank (non-performing loans (NPLs) of 6.8 percent, 90 percent reserved) and DemirBank (6.0 percent, 80 percent), although moderate deterioration is already evident, and this may continue, given the high share of FX lending (over 30 percent of total loans at both banks, including some in unsecured retail books).
Expressbank has better ratios (NPLs of 1.4 percent, 164 percent covered), but much higher borrower concentrations, including the largest exposure (54.4 percent of Fitch core capital; FCC) to a related party.
Profitability is healthy at Unibank (Return on assets (ROA) of 4.6 percent in 2014) and Expressbank (5.3 percent), moderate at DemirBank (1.3 percent) and AtaBank (1.5 percent). "Some further pressure on profitability is likely in the near term due to an increase in deposit rates following moderate funding outflows in February, and additional hedging costs, as deposits have been converting into foreign currency," said the report.
Liquidity is very strong at Expressbank (liquid assets equalled 55 percent of liabilities at end-2014), supported to a significant extent by related party funding, and acceptable at other banks (ratios of around 8-19 percent).
"For Unibank and DemirBank, liquidity is also underpinned by the quick turnover of their retail loan books," said the message. "All banks faced moderate retail funding outflows (up to 4 percent of liabilities) in late February; the situation seems to have stabilised in March, but remains potentially vulnerable. Refinancing risk is low due to the moderate share of foreign funding other than that sourced from international development institutions."
The ratings of all six banks could be downgraded if the worsening of the operating environment results in significant asset quality deterioration and/or a liquidity squeeze, said the agency. However, Fitch's base case expectation is that these risks are already sufficiently reflected in the banks' single 'B' category ratings.
"Upside potential for the ratings is limited at present, given the negative side of the credit cycle," said the analysts of the agency. "However, selective positive rating actions are possible if capital and asset quality positions demonstrate strong resilience to the deterioration of the operating environment. Upside rating potential is slightly stronger at Unibank, which in Fitch's view is somewhat better positioned to weather the economic downturn. However, an upgrade would require an improvement of Unibank's capital position and extended track record of reasonable profitability and adequate asset quality."
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