Azerbaijan, Baku, Sept.15 / Trend /
Fitch Ratings has maintained International Bank of Azerbaijan's (
IBAR) 'BBB-' Long-term Issuer Default Rating (IDR) on Rating Watch Negative (RWN), the agency said.
At the same time, the agency has downgraded the bank's Viability Rating (VR) to 'cc' from 'b-' and maintained the rating on RWN. A full list of rating actions is at the end of this commentary.
The agency maintained other ratings of the bank at the previous level - Short-term Foreign Currency IDR: Support Rating: '2'; 'F3', Long-term Foreign Currency IDR: 'BBB-';
The RWN on IBAR's Long-term IDR reflects continuing concerns over the willingness of the authorities to provide sufficient and timely support to the bank
"Specifically, Fitch is concerned about the government's prolonged failure to recapitalise the bank, and the possibility that the bank's regulatory capital will be replenished by weaker quality subordinated debt, rather than better quality equity," the report says.
According to the Agency's experts, in addition to these near-term issues, the expected partial privatisation of the bank, which would result in the state's stake falling below 50 percent from the current 50.2 percent, could also put downward pressure on the rating.
IBAR has informed Fitch that the bank's regulatory capital deficit will initially be addressed by a contribution of subordinated debt from the Central Bank of Azerbaijan (CBA), which management expects to take place by the end of October 2011. The amount of debt is currently under discussion. However, the transaction will likely be sufficient to bring IBAR back into compliance with regulatory capital requirements, given that subordinated debt contributed by the CBA is classified as Tier 1 capital for regulatory purposes. At the same time, Basel ratios will remain low (as the bank has currently almost fully utilised its Tier 2 capital limit), leaving IBAR still in breach of covenants in certain loan agreements with creditors. IBAR believes that the bank's creditors will be unlikely to accelerate eligible funding (AZN465m, or 11% of total liabilities) in light of the expected contribution of subordinated debt.
"IBAR's long-discussed privatisation appears to be now being pursued more actively. A share sale is currently earmarked to be finalised by end-June 2012, and the intention at present seems to be to attract an international, strategic shareholder, rather than to sell shares locally," Fitch report says.
"However, there is currently little certainty about the size of the stake to be offered or how the eventual privatisation may affect IBAR's business model. At the same time, potential state support will still be factored into IBAR's ratings in light of its dominant market shares and systemic importance, its part policy role, and its relatively small size compared to the sovereign's available resources," the report says.
Given these factors, any differential between IBAR's ratings and those of the sovereign will likely be limited to one notch. If the sovereign's rating is upgraded to 'BBB', IBAR may therefore be affirmed at 'BBB-', the report says.
IBAR estimates at end-2010 (the audited full year IFRS report has not yet been published), the total Basel capital ratio may have decreased to 8.1 percent, and the Tier 1 ratio to 4.9 percent.