Baku, Azerbaijan, August 7
Fitch Ratings has assigned Azerbaijani bank OJSC Expressbank a Long-term Issuer Default Rating (IDR) of 'B'. The Outlook is Stable.
The ratings reflect risks stemming from a structurally weak Azerbaijani operating environment; ExpressBank's narrow domestic franchise and limited track record; significant exposure to related parties, albeit of fairly sound credit quality; and a rapidly growing and hence unseasoned retail loan book, according to the report of the agency.
The ratings also consider a high capital base, adequate asset quality metrics, decent performance to date.
At end-1Q14 more than 44% of total loans were issued to the bank's sister companies, of which the bulk were to one infrastructure construction company mainly providing services to a local state-owned utilities monopoly, Azerenerji (BBB-/Stable), and a further 9% to the subsidiaries of Azerenerji.
"The risk is, however, mitigated by the fact that most of these companies directly or indirectly benefit from the state contracts, these companies and Azerenerji keep significant interest-free placements with the bank (34% of total customer accounts at end-1Q14), which, although not being a formal collateral, still offers some protection in terms of recovery, the bank's high capitalisation, which would allow it to meet regulatory capital requirements if these exposures were fully deducted from capital," the report said.
In retail (40% of end-1Q14 loans) ExpressBank mainly targets general purpose unsecured cash loans. Retail non-performing loans (90 days overdue loans; NPLs) were 0.5% at end-2013, 2x covered by impairment reserves. The NPL origination ratio (a proxy for credit losses, defined as increase in NPLs plus write-offs divided by average performing loans) was below 1% in 2013. However, the losses may be somewhat understated due to high loan growth (26% in 1H14, 102% in 2013).
ExpressBank is mainly funded by customer deposits (88% of total liabilities at end-1Q14), which are quite concentrated, although among the largest ones are affiliated companies (9% of end-1Q14 liabilities) and Azerenerji (18% of end-1Q14 liabilities).
Liquidity risks are mitigated by ample liquidity buffer - this was sufficient to repay 41% of customer funding at end-1Q14 - and fast retail loan turnover, Fitch analysts believe. The share of wholesale funding is negligible and Fitch does not expect it to increase materially in the near-term.
ExpressBank's capital position is robust as expressed by a high 45.8% Fitch Core Capital (FCC) ratio at end-2013. The capital cushion is likely to be gradually consumed by fast loan growth (management targets 50% growth in retail in 2014), but it is supported with a robust internal capital generation capacity (return on average assets of 4.8% in 2013) underpinned by wide margins in retail lending and so far limited loan impairment charges.
ExpressBank is ranked 21st in Azerbaijan by assets.
The agency says that ExpressBank's ratings could be upgraded based on substantial franchise development through growth of third-party business, reduction in volume of operations with affiliated parties (on both sides of the balance sheet) maintenance of reasonable asset quality and profitability.
ExpressBank's Support Rating floor of 'No Floor' and '5' Support Rating reflect its fairly limited systemic importance, as a result of which extraordinary support from the Azerbaijan authorities cannot be relied upon, in Fitch's view. Although support from the bank's private shareholders is possible, it cannot be reliably assessed. Fitch does not expect any revision of the bank's SRF or Support Rating in the foreseeable future.
Expressbank OJSC has been operating from 1989 to 2010 as "Azernegliyyatbank" OJSC. In accordance with the decision of General Meeting of Shareholders and new strategy, "Azernegliyyatbank" OJSC proceeded to implementation of new brand policy in 2008. As a result of this process, bank was renamed to Expressbank OJSC. The shareholders of the bank are local legal entities. There are 17 branches of the bank, including 5 of them in the regions, are operating over the country up to present.