BAKU, Azerbaijan, May 14
By Eldar Janashvili – Trend:
Fitch Ratings has affirmed Azerbaijan-based Expressbank Open Joint Stock Company's (EB) Long-Term Issuer Default Rating (IDR) at 'B' with a Stable Outlook, Trend reports referring to Fitch Ratings’ report.
“The ratings of the bank reflect its exposure to a cyclical and oil-dependent operating environment, which we rate at 'b+',” the report said. “These risks are additionally aggravated by the economic downturn caused by the COVID-19 pandemic and a sharp fall in oil prices in 1Q2020.”
“Fitch expects a sharp contraction of Azerbaijan's GDP by 4.8 percent in 2020 followed by a 2.5 percent recovery in 2021,” Fitch Ratings said. “This may result in material weakening of the bank sector's loan quality, particularly in retail, micro and SME lending.”
“The bank’s exposure to these segments is high, which may expose the bank's asset quality and performance to significant deterioration in 2020,” the report said. “However, these risks are mitigated by the bank's high capital and liquidity buffers, providing the bank with reasonable safety margin.”
“The bank's asset quality metrics were reasonable at end-2019,” the report said. “Impaired loans were a moderate 4 percent of gross loans. Related-party loans (40 percent of end-2018 loans), were repaid in 2019, with positive impact on the bank's asset quality and general company profile.”
“We expect that asset quality will be under pressure in 2020 given the bank's high exposure to unsecured consumer lending (42 percent of gross loans) and micro-lending (14 percent),” the report said.
“In our view, the bank may have to absorb additional impairment losses related to some of these exposures in 2020,” the report said. “Positively, the share of foreign-currency loans was a low 9 percent of gross loans at the end of 1Q2020 (significantly below the sector average of 36 percent).”
“The bank’s overall profitability was strong in 2019, with an operating profit/risk-weighted assets (RWA) ratio of 8 percent,” the Fitch Ratings said. “The bank’s capitalization is a rating strength. At end-2019 its Fitch Core Capital (FCC) ratio was a high 45 percent.”
“The regulatory Tier 1 and total capital ratios were 38 percent and 41 percent at end-1Q2020, respectively, allowing the bank to additionally reserve a substantial 40 percent of its gross loans before breaching the regulatory minimums,” the report said. “We expect the bank should maintain adequate capital buffers in a sharp short-lived economic contraction in 2Q2020 if it is followed by a recovery in 2H2020.”
“The bank is funded mainly by customer accounts (67 percent of liabilities at end-1Q2020) with the majority of funds raised from individuals (54 percent of liabilities),” the report said. “Deposits dropped 10 percent in March and a further 5 percent in April, due mainly to outflows from retail clients.”
“However, liquidity risks are mitigated by a substantial buffer of highly liquid assets (cash and equivalents, short-term interbank placements and placements with the Central Bank of Azerbaijan, investments in securities) covering a high 50 percent of deposits at end-1Q2020,” the report said.
“An upgrade of the ratings is in the near-term is unlikely given the negative outlook for the Azerbaijan banking sector,” the report said. “However, in the longer term, the ratings could be upgraded if the bank improves its franchise and strengthens its performance. The bank would also need to maintain solid capital and liquidity buffers for a rating upgrade.”
“The bank’s ratings could be downgraded if the bank's capital position deteriorates significantly as a result of increased loan impairment charges or capital withdrawal by shareholders,” the Fitch Ratings concluded.
