Standard & Poor's affirms its outlook on 'Kapital Bank' OJSC

Baku. 18 February. REPORT.AZ/ On February 17, 2016, Standard & Poor's Ratings Services said today that it had revised its outlook on Azerbaijan-based Kapital Bank OJSC to negative from stable. The 'BB-/B' long- and short-term counterparty ratings were affirmed, Report informs. 

'We revised our outlook on Kapital Bank to negative from stable because the deteriorating economic environment is increasingly weighing on the bank's credit profile. Nevertheless, in our view, the bank's solid capital position currently counterbalances this pressure, so we have affirmed the ratings. We think that if the economy weakens further, the bank might adjust its strategy, scaling back growth. Sustainable, high margins and one-time income from revaluation of foreign currency assets helped the bank achieve a net profit of Azerbaijan manat (AZN) 64 million (about $55 million using an average exchange rate in 2015) last year, under Azerbaijani generally accepted accounting principles.

At the same time, we believe that Kapital Bank is not immune to systemwide risks and, like other banks in the system, will be affected by worsening economic conditions. We believe the NPL ratio could deteriorate to 13%-15% in the next 12 months from 9% as of June 30, 2015, as households' real disposable incomes diminish, in line with the general trend in the banking sector. But we don't expect the share of NPLs will exceed that of the system during 2016. We note that about 20% of the bank's loan book is guaranteed by the Ministry of Finance of Azerbaijan, since the respective loans relate to certain government-related project finance agreements. These sovereign guarantees partly mitigate potential credit risks on the loan book.

We could lower the ratings over the next 12-18 months if Azerbaijan's economic prospects weakened further, making operating conditions even more difficult for the banking sector. This could result in faster deterioration of Kapital Bank's asset quality than we currently anticipate, leading to the capital adequacy metric decreasing below 7%, with a negative impact on the bank's stand-alone credit profile. A downgrade could also follow if the bank's funding structure comes under pressure because of sharp lending growth that is not matched by a rise in customer deposits, thereby threatening the stability of the bank's funding base.

The likelihood of a positive rating action in the next 12 months is currently remote because of the difficult operating conditions in Azerbaijan. However, if the situation eases sustainably and the bank demonstrates resilience to the weaker environment, we could consider revising the outlook to stable', the rating service says.