Azerbaijan, Baku, March 27 / Trend /
Fitch Ratings has upgraded Azebaijan-based Unibank Commercial Bank (UB) and Demirbank's (Demir) Long-term Issuer Default Ratings (IDRs) to 'B' from 'B-'. At the same time, Fitch has affirmed Technikabank (TB) and AGBank's (AGB) Long-term IDRs at 'B-'. The Outlooks on all four banks are Stable. A full list of rating actions is at the end of this commentary.
The upgrades of UB and Demir reflects Fitch's acknowledgement of their relatively sound credit profiles in the post-crisis environment, as reflected by either better asset quality metrics (in the case of Demir) or greater loss absorption capacity (UB) compared to peers. Although both banks' profitability has been notably reduced relative to pre-crisis levels, they have continued to generate profits on a cash basis, while accumulated problem loans have been properly recognised and prudently reserved.
In Fitch's view, UB and Demir also have somewhat sounder corporate governance than peers, translating into greater transparency, lower related party lending and lesser accounting risks. Cooperation with international financial institutions (which hold minority stakes in both banks) has also been beneficial in terms of capital and liquidity replenishment, in particular for Unibank.
The ratings of TB and AGB continue to reflect their weaker credit metrics, in particular significant unreserved non-performing loans (NPLs) and potential for further NPL recognition from restructured loans, combined with only moderate capacity to absorb additional credit losses. The quality of their capital and reported profits is also undermined by the high proportion of accrued interest income not received in cash (particularly in the case of AGB).
However, Fitch notes that asset quality pressures have abated somewhat at both banks, and the currently supportive operating environment is allowing them to gradually absorb accumulated problems through business growth. Strong deposit inflows are also supporting sector liquidity, and allowing the banks to manage refinancing needs.
Upward potential for the ratings of all four banks is currently constrained by their limited franchises and generally high balance sheet concentrations, resulting in weak financial flexibility. Additional challenges arise from the generally high risk profiles of local borrowers and the cyclical oil-dependent economy, which is potentially vulnerable to external shocks.
Downward pressure on the ratings could emerge in the case of deterioration in the operating environment, which would be particularly sensitive for banks that demonstrated high growth rates in 2011 (above 20% in the case of UB, AGB and TB). Increased competition in the retail segment, which is the focus of business development for all four banks, may also be detrimental to the banks' credit profiles through margin compression and potential loosening of underwriting standards.
Downward pressure on TB's profile additionally arises from its high exposure to the construction sector (which exceeded the bank's equity at end-2011), the poor liquidity of its corporate loan book (which is dominated by project-finance loans with significant grace periods) and some corporate governance concerns due to low transparency in respect to ultimate shareholder control of the bank. Unlike its peers, TB has not received fresh equity during the past four years, and the shareholders' capacity for capital replenishment cannot be assessed.
The rating actions are as follows:
AGB
Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Demir
Long-term IDR: upgraded to 'B' from 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
UB
Long-term IDR: upgraded to 'B' from 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
TB
Long-term IDR: affirmed at 'B-'; Outlook Stable
Short-term IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'