Baku, Azerbaijan, June 30
By Anvar Mammadov – Trend:
S&P Global Ratings currently views liquidity of Muganbank OJSC as adequate, the ratings agency said in its report.
Cash and money-market instruments, namely placements with the National Bank of Azerbaijan and other banks, account for about 21 percent of total assets, according to the report.
“In December 2015 and in the first quarter of 2016, a turbulent period in Azerbaijan associated with sharp local currency depreciation and weakened confidence in the banking sector, the bank experienced an about 10 percent outflow of deposits,” said the report. “This outflow was compensated by the funds placed within the bank by the shareholder and its business partners, which helped maintain the bank's liquidity position.”
S&P Global Ratings affirmed its 'B-' long-term and 'C' short-term counterparty credit ratings on Azerbaijan-based Muganbank OJSC. The outlook remains negative.
The affirmation balances the agency’s view that the deterioration of the global economy is likely to continue to put pressure on Muganbank's financial fundamentals, especially its asset quality and funding profile. At the same time, capital support provided by the shareholder in February 2016 could support the bank's loss-absorption capacity, the agency reported.
Muganbank is among Azerbaijan's top 15 financial institutions, with about 520 million Azerbaijani manats (about $350 million) in assets as of May 1, 2016. It lends mostly to small and midsize enterprises, but it is expanding into the retail segment, namely granting loans to pensioners. The S&P anticipates that the bank will demonstrate a risk-averse strategy amid the currently difficult economic conditions.
“Our risk-adjusted capital (RAC) ratio stood at 5.6 percent as of Dec. 31, 2015,” said the report. “We anticipate moderate improvement of this ratio to 5.5-6 percent in the next 12-18 months, reflecting deleveraging and the capital injection worth five million manats the shareholder made in February 2016. We also understand that the shareholder could inject additional capital support if credit costs exceed the bank's current management's estimates.”
In particular, key risks are a possible increase in credit costs in the retail loan portfolio and potential one-off events in the corporate portfolio, due to concentrations, according to the analysts of the agency.
“Our base-case scenario implies that the bank's credit costs will likely remain manageable, at 4-5 percent of its gross loan book,” the report said. “Asset-quality indicators for Muganbank are in line with the system average, with nonperforming loans comprising about 5.2 percent of the bank's total loan book as of Dec. 31, 2015.”
“We believe this ratio will deteriorate to 9-10 percent in the next 12-18 months, though, reflecting households' diminishing real disposable income, as well as partial transformation of currency risk into credit risk on the back of significant local currency depreciation (about 40 percent of the bank's loan book is denominated in hard currencies),” read the report.
The ratings agency may revise the outlook to stable if it observes that the bank has demonstrated resilience to deteriorating market conditions and kept asset quality and liquidity at sustainable levels through 2016.