Fitch affirms Azerbaijani Kapital Bank at 'B+'; Outlook Stable

Fitch affirms Azerbaijani Kapital Bank at 'B+'; Outlook Stable

Azerbaijan, Baku, Jan. 30 / Trend A. Akhundov /

Fitch Ratings has affirmed Azerbaijan-based Kapital Bank's (KB) Long-term foreign currency Issuer Default Ratings (IDRs) at 'B+', with a Stable Outlook, Fitch Ratings said today.

Long-term foreign currency IDR: affirmed at 'B+', Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Viability Rating: affirmed at 'b-'
Support Rating: affirmed at '4'
Support Rating Floor: affirmed at 'B+'

KB's Long- and Short-Term IDRs, Support Rating and SRF reflect potential support from the Azerbaijan authorities in case of need. Fitch's' assessment of potential support takes into account the bank's important social role in distributing pensions through the largest country-wide branch network and its active involvement in state-funded infrastructure development projects.

At the same time, Fitch continues to view the probability of state support as only limited given KB's narrow commercial franchise, its private ownership and the weak track record of support from the authorities demonstrated in respect to the country's largest bank, International Bank of Azerbaijan (IBA; 'BB'/Stable).

"KB's Viability Rating reflects the bank's limited commercial franchise, consistently weak performance, poor asset quality metrics, pressure on capital and significant related party lending," the message said. "At the same time, the rating also acknowledges the bank's ample liquidity, essential to offset volatility in customer accounts driven by budget transfer payments, and the absence of material non-government wholesale borrowings. KB's funding is largely sourced from customer accounts (42% at end-9M12) and borrowings from state agencies (57% at end-9M12)."

In the course of the past four years (2009 - 2012) KB has increased its loan book by almost a factor of five, from 345m manat to 1.7bn manat, mostly through the increase of agency lending (around 66% of KB's total loan book at end-9M12). Agency loans are directly financed by the Azerbaijan authorities and in most instances include sovereign guarantees. Related party construction exposures accounted for 17% of loans at end-9M12.

"At end-2012, KB's level of non-performing loans (NPLs; overdue for more than 90 days) was around 22% of gross commercial loans, higher than at other Fitch-rated banks in Azerbaijan," the message said.

Fitch estimates that KB could fully reserve the reported NPLs; however, in this case its capital ratio would approach the regulatory minimum (12%).

"Furthermore, the loss absorption capacity remains under pressure from KB's low/ negative internal capital generation and expected potential growth in commercial lending," the message said. "A 10m manat new equity injection planned for 2013 would result in only temporary improvement in the bank's capitalisation as it is likely to be consumed by loan growth and operating losses."

Kapital Bank is the second largest bank in Azerbaijan by assets and retail deposits.

Kapital Bank has the widest branch network and a large customer base. To date, 89 branches and 11 offices of the bank are operating throughout the country.

Until the summer of 2008 Kapital Bank was fully state-owned. Currently, the main shareholder of Kapital Bank is Pasha Holding, which owns 97.75 percent of the shares.

The official exchange rate is 0,7844 AZN/USD on Jan. 30.

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