Fitch Ratings keeps stable Expressbank’s credit rating

Baku. 11 August. REPORT.AZ/ “Fitch” International Rating Agency has affirmed Expressbank Open Joint Stock Company's (EB) at 'B' with a Stable Outlook.

Report informs, the affirmation of EB's ratings reflects only limited changes to its credit profile over the last 12 months.

According to the agency, the ratings take into account EB's limited franchise in the difficult Azerbaijan operating environment and a high level of related-party lending. Positively, the ratings reflect EB's solid capital buffer, still reasonable, albeit moderately deteriorating, asset quality, limited exposure to foreign currency lending and ample liquidity. The Stable Outlook reflects Fitch's expectation that, despite the potential for some further asset quality deterioration, this should be covered by pre-impairment profits and additionally mitigated by the bank's solid capital buffer.

EB's corporate loan book (55% of gross loans at end-1Q17) is reportedly performing with zero NPLs. It almost entirely consists of exposures to the bank's main corporate shareholder and its subsidiaries (79% of FCC), including a large construction company engaged in infrastructure construction and to a start-up diversified production plant, the development of which is supported by the government. In addition, EB issued a AZN30 million uncovered guarantee in favour of these related companies (around 22% of FCC).

Positively, total related-party exposure decreased to AZN139 million (101% of FCC) at end-1Q17 from AZN192 million (138% of FCC) at end-2015, and may decrease further due to the gradual phasing-in (by mid-2018) of the regulatory deduction of related-party exposures from Tier 1 capital for capital adequacy purposes. These borrowers reportedly target repaying foreign currency loans first, thus also reducing EB's foreign currency risks.

“Fitch” has assessed “Expressbank’s” Support Ratings SR of 5 and the SRFs of 'No Floor' saying that it reflects the bank’s limited scale of operations and market shares. Although Fitch believes some regulatory forbearance may be available for the bank, in case of need, any extraordinary direct capital support from the Azerbaijan authorities is very uncertain. This view is also supported by the recent default of International Bank of Azerbaijan (IBA; 'Restricted Default'; See 'Fitch Downgrades International Bank of Azerbaijan to 'RD'' on 24 May 2017 on www.fitchratings.com), which is the largest bank in the country and government-owned, meaning that state support for less systemically-important privately-owned banks cannot be relied upon.