Baku, Azerbaijan, Dec. 4
By Azad hasanli - Trend:
Standard & Poor's Ratings Services has affirmed its 'BB-/B' long- and short-term counterparty credit ratings on Azerbaijan-based PASHA Bank, the message of the services said Dec.3.
At the same time, the rating services revised its outlook on the long-term ratings on the bank to negative from stable, according to the message.
"We assess PASHA Bank's business position as adequate," said the message of the S&P. "With total assets of 1.3 billion manats as of Dec. 31, 2014, the bank is in the top-three in the country and accounts for 5 percent in terms of assets, which is meaningful in the Azerbaijani concentrated banking sector where large banks dominate."
The S&P considers PASHA to have a valuable franchise in local corporate banking, with some potential to further expand into the small and midsize enterprise segment.
"PASHA Bank's funding is below average and its liquidity adequate, in our view," said the message. "Although the bank has made some progress in making its funding structure broader and more granular, we still view the bank as lacking diversity across sources and having only limited access to core customer deposits. The funding base remains highly concentrated and the top-20 depositors account for more than 66 percent of customer deposits."
At the same time, the S&P acknowledges the bank's gradual improvement in funding-base diversification through securing funding from unrelated corporate deposits, private banking clients, and financial institutions. If it continues such efforts and establishes a longer track record of a stable and diversified funding base, the S&P may reassess its view of the bank's funding position in the long term.
The ratings services notes that, given its concentrated funding profile, PASHA Bank has to maintain a sizable cash cushion.
"The bank's loan-to-deposit ratio was 76 percent as of Dec. 31, 2014, comparing favorably with that of peers," said the message. "We view positively that the bank's cash assets and liquid securities cover about 70 percent of short-term customer deposits and more than three times the debt maturing within 12 months. We believe that, in the future, the bank will gradually decrease the percentage of liquid assets to total assets, and reuse liquidity to expand its loan portfolio."
The outlook revision reflects the growing concerns regarding PASHA's risk position, mostly stemming from the worsening loan book performance and increasing provisioning needs. Over the past two and a half years, the rating services observed substantial deterioration in the bank's asset quality metrics, which eventually resulted in nonperforming loans (NPLs; overdue more than 90 days) growing to 10.7 percent of its loan portfolio as of late 2014.
"We expect this ratio to reach close to 15-17 percent as of late 2015 and remain high in 2016-2017, due to slow work-out mechanisms and the difficult macroeconomic environment in Azerbaijan," said the message.
The bank's credit costs for 2014 were high, at 7.2 percent, mostly driven by a number of isolated but sizable nonpayments by a few large corporate borrowers, S&P said. As a result of high provisioning needs, the bank has posted a loss of 2.7 million Azerbaijani manats (AZN) in 2014.
Given that the bank's loan book remains very concentrated, amid persisting economic constraints, the S&P expect credit costs to remain high at 6-8 percent for the next two years, and the bank to be loss-making in 2015 and likely in 2016.
"Our assessment of PASHA Bank's risk position as moderate also reflects very high loan growth in the previous years, as well as significant lending concentrations, which could also result in greater vulnerability of the balance sheet to sizable one-off default events in the corporate loan book," said the message. "As of Dec. 31, 2014, the top-20 loans were a very high 62 percent of total loans, but they were somewhat mitigated by strong capital buffers, resulting in the top 20 exposures equating to 108 percent of total adjusted capital."
At the same time, PASHA Bank's strong capital position somewhat balances this risk, according to the message.
"We believe that PASHA Bank remains decently capitalized, although we see significant deterioration in the bank's earnings capacity," the message said. "We do not expect any new capital injections, therefore, the losses will constrain the capital position further. On a positive note, the bank has now decided to slow down its asset growth, which should help its capital adequacy. We still expect that PASHA's Standard & Poor's-risk-adjusted capital (RAC) ratio will remain above 10 percent within the next 12-18 months."