S&P revises its outlook on Azerbaijan's Muganbank to positive from stable

S&P revises its outlook on Azerbaijan's Muganbank to positive from stable

Azerbaijan, Baku, June 19 / Trend E. Aliyev /

Standard & Poor's Ratings Services revised its outlook on Azerbaijan's Muganbank to positive from stable. At the same time, we affirmed our 'B-/C' long- and short-term counterparty credit ratings on the bank, S&P said today.

The outlook revision reflects our view that the recent capital increase will strengthen Muganbank's balance sheet and provide the bank with the capacity to increase its competitive position in the domestic market. If well managed, this could improve the bank's future core profitability, which was fairly weak in 2012, the statement said.

Muganbank has recently benefited from an additional capital increase of Azerbaijan manat (AZN) 10 million. We expect the bank to gradually become one of Azerbaijan's top 10 banks in terms of loans and assets, and even higher in the ranking in terms of net profit.

"The agency notes that the bank has successfully developed relationships with international financial institutions and government funds, attracting less expensive funding facilities and therefore improving its franchise and, potentially, its profitability ratios. Our affirmation of our 'C' short-term rating reflects the inherent risks for a small bank with an undiversified business model in a high risk country, and certain liquidity risks," the statement said.

We base our ratings on Muganbank on a 'bb-' anchor for banks operating predominantly in Azerbaijan, and our view of the bank's "weak" business position, "adequate" capital and earnings, "moderate" risk position, "average" funding, "adequate" liquidity, and "low systemic importance" in Azerbaijan, as our criteria define the terms, the statement said.

The agency views the bank's business position as weak because of its small market share, persistent strategic uncertainties, and very compact management team that is in danger of placing too much importance on key individuals.

However, the agency thinks there is potential for the bank's business position to improve. The bank is among Azerbaijan's top 15 financial institutions and had about 285 million AZN in assets on Dec. 31, 2012. It mostly lends to small and medium businesses. We note that the bank's owners, who are Azeri businessmen, are now looking to sell a stake to external foreign investors, which adds some uncertainty regarding the bank's future development. If any sale happens, we will review the bank and may take a rating action based on the new owner's strategic priorities, the agency said.

S&P raised our assessment of the bank's capital and earnings to "adequate" following the AZN 10 million cash injection at the end of 2012. We think that the bank's earnings are going to recover after one-off provisioning needs incurred in 2012 that influenced the bottom line results. The bank's trends in net interest margin and fee and commission income are positive, in our view.

The positive outlook reflects our expectation that the bank will continue to grow in its current market niche, and that its core banking profitability will improve gradually and give it an enhanced buffer to cushion credit costs.

The agency might consider a positive rating action if we saw that the bank's market share was increasing enough to push it into the top 10 in terms of loans and assets without harming its financial profile, notably its asset quality indicators.

The agency might revise the outlook back to stable if asset quality deteriorated sharply, with non-performing loans reaching double digits, although this is not our base-case expectation. The agency could also consider a negative rating action if the funding profile deteriorated significantly, leading to depressed liquidity and loss of confidence among some large depositors, the statement said.

The official exchange rate is 0,7846 AZN/USD on June 19.

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