Credit rating outlook of Muganbank downgraded

Baku. 18 February. REPORT.AZ/ "Standard & Poor's"affirmed 'B-/C' long- and short-term counterparty credit ratings on Muganbank. The outlook on the bank remains negative, Report informs.

'The affirmation reflects our view that Muganbank's business profile is somewhat more sustainable than that of many midsize banks in Azerbaijan, Russia, or Kazakhstan. Muganbank has a well-established position in most of Azerbaijan's regions, an adequate business mix, and a less aggressive growth strategy. Because of its track record of sound core banking profitability, we consider Muganbank's business position to be moderate.

In our view, Muganbank's asset quality will deteriorate in 2016, reflecting households' diminishing real disposable income, as well as the partial transformation of currency risk into credit risk on the back of significant local currency depreciation (about 20% of the bank's loan book is denominated in hard currencies). We also think that funding sources within the banking sector are shrinking, given the influence of low oil prices on the deposits of government-related entities, Azerbaijan's contracting economy, and increased deposit turbulence due to the manat's depreciation.

The negative outlook reflects our view that the difficult operating environment, the weaker manat, and higher provisioning needs could erode the bank's capital buffer if not offset by shareholder support within the next 12 months.

We could lower the ratings in the next 12-18 months if we saw Muganbank's funding and liquidity position deteriorating significantly. Similarly, a downgrade would follow if Muganbank's capital position declines significantly more than we currently expect, with our forecast RAC ratio falling below 5%.

The likelihood of a positive rating action in the next 12 months is currently remote because of the highly challenging operating conditions in Azerbaijan.

We may revise the outlook to stable if the bank were to demonstrate resilience to deteriorating market conditions and sustain asset quality throughout 2016', the rating agency says.