Baku. 19 January. REPORT.AZ/ Moody's Investors Service (MIS) has today assigned the following ratings to VTB Bank (Azerbaijan) (VTBAZ): local- and foreign-currency deposit ratings of Ba3, standalone bank financial strength (BFSR) rating of E+/Stable (equivalent to a b2 baseline credit assessment [BCA]), and Not-Prime short-term deposit ratings, Report informs referring to the MIS.
According to information, VTB Azerbaijan's Ba3 long-term local currency deposit rating incorporates the rating agency's assessment of a high probability of parental support from Russia-based Bank VTB JSC. As a result, VTB Azerbaijan's deposit ratings receive two notches of uplift above its B2 BCA.
VTB Azerbaijan's standalone E+ BFSR is supported by the bank's close integration into the VTB group, which benefits the bank in terms of operational, capital and funding support. At the same time, VTB Azerbaijan's standalone creditworthiness is currently constrained by challenging operating conditions in Azerbaijan given recent drop in oil prices, bank's modest business position in the domestic banking sector, its high credit risk appetite as evidenced by rapid loan growth and pressure on asset quality upon loan book seasoning amid worsening operating environment.
Today's rating action is based on VTB Azerbaijan's audited IFRS accounts for the period 2011-13, Q3 2014 IFRS accounts reviewed by the auditors, and information provided by the bank's management.
Moody's parental support assumptions for VTB Azerbaijan's deposit ratings take into account: (1) its 51% ownership by Bank VTB and the parent's full operational control; (2) VTB Azerbaijan's high integration into VTB, which shares its name and brand; and (3) the VTB group's commitment to develop its Azerbaijan franchise, which is evidenced by a track record of capital injections and funding allocation.
Moody's notes that VTB Azerbaijan's high credit risk appetite, evidenced by its rapid growth, renders asset quality vulnerable to loan book seasoning amid expected worsening of operating conditions in Azerbaijan given recent drop in oil prices. The rating agency has already observed an increasing trend in the volume of non-performing loans: total problem loans (including 90+ days overdue plus restructured) increased to 7.7% of gross loans as of Q3 2014 from 2.6% at year- end 2013, which is, however, still lower than the 12% market average. Current loan loss reserves coverage at 55% of problem loans as of Q3 2014 is viewed by Moody's as insufficient; therefore the bank would need to create additional provisions. At the same time, the current pre-provision income (PPI) at 7.3% of average total assets as of Q3 2014 provides an ample buffer against expected increase in credit costs.
VTB Azerbaijan currently has a limited customer deposit base, and its funding is mainly dependent on its parent. Bank VTB's financing accounts for around 80% of its non-equity liabilities. VTB Azerbaijan plans to diversify its funding base in the future by increasing the volume of customer deposits (both corporate and retail) and issuing local bonds.