Baku, Azerbaijan, August 27
Standard & Poor's Ratings Services said today that it had assigned its 'BB-' long-term and 'B' short-term counterparty credit ratings to Azerbaijan-based Kapital Bank OJSC. The outlook is stable, said in statement of agency.
Standard & Poor's based rating on Kapital Bank on its 'bb-' anchor for a commercial bank operating only in Azerbaijan. The anchor is S&P starting point for deriving an issuer credit rating.
"The ratings reflect our view of Kapital Bank's good business diversity and solid market positions. Our assessment also reflects the bank's adequate capital buffer with good loss absorption capacity in the challenging Azeri environment. We view the bank as having "high" systemic importance in a "supportive" regime, which is a rating positive factor", said in statement.
S&P assess Kapital Bank's business position as "adequate," as defined by their criteria. With total assets of Azerbaijan manat (AZN) 1.7 billion (US$1.6 billion) as of June 30, 2015, the bank is the second largest in the country in terms of assets and has a valuable franchise in local corporate and retail segments.
"Our assessment of Kapital Bank's capital and earnings is "adequate," as defined by our criteria. The bank's capital buffer materially strengthened in 2014 when the shareholders injected AZN70 million into the bank, and later, further increased the authorized share capital by an additional AZN36 million of retained earnings. Thus, as of Dec. 31, 2014, our risk-adjusted capital ratio, before adjustments for diversification, stood at a comfortable 10.4%. However, we expect that this metric will gradually decline over the next 12-18 months to about 9.0%-9.5%, which is neutral for our ratings on banks in countries with a 'bb-' anchor", said in statement of S&P.
In S&P view, Kapital Bank's overall risk position is "moderate," as defined by their criteria. The bank's track record in underwriting credit, as measured by nonperforming loans (loans which are overdue by more than 90 days) to total loans and annual loss provisions to loans, is generally in line with Azerbaijan's banking system average. At the same time, in 2014, Kapital Bank demonstrated aggressive growth in its retail portfolio, which almost doubled over one year.
"We understand that this was due to the bank's attempts to gain momentum in the booming consumer lending segment in Azerbaijan and leverage its wide franchise and brand recognition. We believe credit costs may increase in the near future, in line with market trends", analysts said.
S&P assess Kapital Bank's funding as "average," as defined by our criteria. Although its loan-to-deposit ratio of 145% looks relatively aggressive, it is in line with the system average ratio of 150%.
Kapital Bank's liquidity is currently "adequate" as defined by our criteria. "We understand that cash and money market instruments exceed 30% of total assets or AZN580 million as of June 30, 2015, which amply covers the bank's short- and long-term wholesale debt", said in statement.
The long-term counterparty credit rating is one notch higher than the bank's stand-alone credit profile, which we assess at 'b+'. This reflects our current view of Kapital Bank's "high" systemic importance and the Azerbaijan government's "supportive" stance toward the domestic banking sector.
"The stable outlook balances our concerns that deteriorated operating conditions in Azerbaijan may intensify pressure on the bank's financial fundamentals, especially its asset quality and earnings capacity, against an adequate capital buffer with good loss-absorption capacity in the challenging environment", analysts said.
Agency could revise the outlook to positive if the bank demonstrates a positive track record of sustainable financial performance with noticeable improvements in asset quality metrics. Such a scenario could materialize if operating conditions in Azerbaijan substantially ease, while at the same time our other analytical factors remain unchanged, said in statement.