Baku. 10 March. REPORT.AZ/ Fitch Ratings-Moscow-09 March 2016: Fitch Ratings has affirmed International Bank of Azerbaijan's (IBA) and Pasha Bank's Long-term Issuer Default Ratings (IDRs) at 'BB' and 'BB-', respectively, Report informs.
The agency has also downgraded the Long-term IDR of Azerbaijan's AccessBank (AB) to 'BB+' from 'BBB-'. The outlooks on all three banks are negative.
The rating action follows the downgrade of Azerbaijan's IDRs and Country Ceiling (see "Fitch Downgrades Azerbaijan to 'BB+'; Outlook Negative" dated 26 February 2016.
The affirmation of IBA's Support Rating Floor (SRF) and Long-term IDR at 'BB' balances the weaker ability of the authorities to provide support to the bank, as reflected by the sovereign downgrade with Fitch's view of a now stronger propensity of the authorities to support, due to a considerable improvement in the support track record. The latter is reflected in (i) the AZN3bn clean-up of IBA's balance-sheet, executed through buy-outs of impaired loans, which was finalised in January 2016; and (ii) a planned AZN500m equity injection, which will support IBA's solvency and also increase the Ministry of Finance's stake in the bank to above 80%, from 51.1% at present.
Fitch's view of the improved propensity to support has resulted in a reduction, to one notch from two, in the difference between IBA's and the sovereign's Long-term IDRs. IBA's Long-term IDR has been removed from Rating Watch Positive (RWP). The RWP had reflected the potential for IBA to be upgraded if the problem loan buy-out was completed and the sovereign rating remained at its previous level. However, the sovereign downgrade meant that the RWP was removed without an upgrade of IBA.
IBA's IDRs, SRF and the Support Rating of '3' continue to reflect Fitch's view of a moderate probability of support from the Azerbaijani authorities. In assessing the propensity, Fitch views favourably, in addition to the improved track record, the following factors: (i) IBA's high systemic importance, stemming from its dominant market shares (the bank accounts for 35% of sector assets) and substantial funding from state-owned entities (around AZN1.5bn or 15% of end-1H15 liabilities); (ii) the bank's majority state ownership; (iii) IBA's fairly small size relative to the sovereign's available resources (IBA's equity and assets equalled to less than 2% and 25% of GDP at end-2015, respectively); and (iv) the potentially significant reputational damage for the authorities in case of IBA's default.
The downgrade of AB's Long-term IDR to 'BB+' from 'BBB-' and Support Rating to '3' from '2' reflects the revision of Azerbaijan's Country Ceiling to 'BB+' from 'BBB-'. This in turn reflects Fitch's view of an increase in transfer and convertibility risks - in line with the weakening of the sovereign credit profile - which could constrain the ability of AB to utilise support from its International Financial Institution (IFI) shareholders to service its foreign currency obligations. Fitch continues to view the propensity of the IFIs to provide support to AB as high.
The support considerations take into account (i) the IFIs' strategic commitment to microfinance lending in developing markets; (ii) the IFIs' direct ownership of AB, stemming from their participation as founding shareholders; (iii) the significant integration of IFI guidelines into AB's risk management; and (iv) Fitch's expectation that a full exit of the IFIs from the bank in the next few years is unlikely. The Negative Outlook on AB's IDRs reflects that on the sovereign.
Pasha Bank's IDRs, SR and SRF are underpinned by the potential support available to the bank from the Azerbaijan authorities, in case of need. Fitch's view on support takes into account: (i) the combined market shares of PB and its sister Kapital Bank (KB) in considering systemic importance, as they are part of a single group; (ii) the somewhat improved track record of sovereign support for the banking sector in light of the ongoing financial rehabilitation of IBA; and (iii) the benefits of the banks being ultimately owned by a structure closely connected to the Azerbaijani authorities, which at least in the near term should make support more likely, in Fitch's view.
PB and KB, which are both owned by Pasha Holding, at end-1H15 had combined market shares of 14.1% in deposits (6% KB; 8.1% PB) and 8.8% of loans (5.6% KB, 3.2% PB), making them comfortably the second-largest banking group in Azerbaijan after IBA. In Fitch's view, any sovereign support would likely be available to both of the banks, in case of need, rather than one of the institutions in isolation.
The Outlook on PB's IDR has been revised to Negative from Stable to mirror that on the sovereign, while the differential between the sovereign and bank ratings has narrowed to two notches from three.