BAKU, Azerbaijan, June 26. The international S&P Global Ratings Agency has confirmed the long-term and short-term credit ratings of the issuer of the Azerbaijani Muganbank OJSC at the level of "B-/B", Trend reports.
According to the information, the forecast of rating changes is "stable".
Analysts expect that changes in the ownership structure and a new business development strategy will contribute to strengthening the bank's customer base.
New shareholders can support the further development of the bank thanks to their business connections and income from other businesses.
“The consultants of the new shareholders are currently developing a new strategic plan to attract medium-sized companies and offer them lending products, cash management, and salary projects, as well as proactive restoration of problem loans formed in previous years and attraction of cheap deposits, which should support the net interest margin and profitability of the bank,” S&P said.
Analysts expect the bank's capitalization to decline in 2024, as new capital injections will be used to finance business growth.
"After the injection of capital by shareholders in the amount of 55 million manat ($32.3 million) in the first half of 2023, we expect that the risk-adjusted capital ratio (RAC) will improve from 2.4 percent at the end of 2022 to about 5.4-5.8 percent by the end of 2023. At the same time, the new capital will be used to grow the loan portfolio in the next two years. As a result, we expect that the RAC coefficient will decrease to below 5 percent in 2024-2025," S&P said.
According to the S&P Global Ratings Agency, the new shareholders plan to increase the profitability of the bank.
"The new shareholders seek to increase profitability by reducing the cost of financing, increasing the share of loans with higher margins, and optimizing operating costs," the agency added.
According to analysts' forecasts, the asset quality of Muganbank will remain lower than that of comparable Azerbaijani financial institutions, but S&P expects that the positive trend of reducing the volume of problem loans will continue.
"Muganbank's third-stage loans increased to 17.8 percent of the total volume of loans at the end of 2022 from 15.8 percent a year earlier, compared with the average for the system, which we estimate at 6-8 percent. Loans of the second stage amounted to 13.3 percent at the end of 2022. Muganbank still has a high proportion of problem loans, especially to pensioners and entrepreneurs, which peaked at 37 percent at the end of 2018," the analysts said.
“These problem loans have remained unresolved since the economic downturn of 2016, which followed a sharp decline in oil prices and the devaluation of the local currency. The new shareholders plan to actively restore and write off non-performing loans in order to reduce the level of third-stage loans below 10 percent over the next 24 months," the analysts added.
The S&P forecasts a generally stable funding profile and adequate liquidity over the next 12 months.
The bank plans to reduce the cost of funding by replacing expensive term retail deposits with cheaper current accounts of legal entities and individuals. Muganbank was able to increase the volume of its deposit portfolio by 79 percent by offering higher rates in 2021-2022 than the market average, which led to an increase in the cost of funding.
The outflow of deposits in the amount of 20 percent of the deposit portfolio in the first half of 2023 was caused by the expected reduction in deposits of legal entities in accordance with historical trends in the market in 1Q2023, as well as a deliberate reduction in interest rates on deposits of individuals to reduce the cost of financing.
“We assume that the new shareholders will be able to attract new investors with lower rates, as well as some new funding from international financial development institutions. We believe that the bank's "loans/deposits" ratio is unlikely to deteriorate significantly. As of June 16, 2023, the bank's regulatory liquidity ratio was 58.7 percent, which is significantly higher than the minimum value of 30 percent," the S&P said.
Muganbank's stable outlook reflects S&P's expectations that the bank will maintain a stable financial profile and adequate liquidity by gradually expanding its business, reducing old problem loans, and increasing profitability over the next 12 months.
"Although this is not included in our baseline scenario, we will consider any signs of weakening liquidity over the next 12 months as a reason for negative rating action. In addition, a decrease in asset quality, leading to significant pressure on the bank's solvency ratios, may lead to a downgrade. This can happen, for example, if the growth of lending above the average will lead to a rapid increase in credit risk," the agency noted.
Analysts note that a positive rating action may follow if the bank demonstrates a history of significant and sustained improvement in asset quality and profitability in accordance with the system averages and regional analogies while maintaining a stable funding and liquidity profile.
