Baku, Azerbaijan, Sept. 16
By Azad Hasanli – Trend:
Fitch Ratings has downgraded Azerbaijan-based DemirBank's (Demir) Long-Term Issuer-Default Rating (IDR) to 'B-' from 'B' and Viability Rating (VR) to 'ccc' from 'b'.
The agency has also maintained both ratings on Rating Watch Negative (RWN).
The downgrades of Demir's ratings reflect Fitch's view that the bank's credit profile has significantly weakened compared with the previous review in November 2015.
According to Fitch, Demir's VR of 'ccc' reflects the bank's weak asset quality, vulnerable capital position and negative pre-impairment profitability on a cash basis.
However, the bank's VR benefits from its satisfactory liquidity position, supported by access to funding from international financial institutions (IFIs), including the bank's minority shareholders, European Bank for Reconstruction & Development (25 percent stake) and FMO (10 percent stake), Fitch said.
According to Fitch, that view reflects the bank's recent announcement of a planned 50 million manat equity injection, which could moderately reduce risks for senior creditors, at least in the near term.
The RWN on the IDRs reflects the risk that the bank's asset quality and capital position, even after the planned equity injection, will warrant a lower rating than 'B-'; and the risk that the equity injection will not take place, Fitch said.
According to Fitch, at end-1H16, Demir reported in its regulatory accounts that the principal amount of non-performing loans (NPLs; 90 days overdue) was equal to a high 28 percent of gross loans (up from 8 percent at end-2015).
Fitch said that in addition, interest accrued, but not received in cash, made up a further 17 percent of gross loans. Together, the two items were only 22 percent covered with impairment reserves.
Fitch views Demir's liquidity position as reasonable given that the liquidity cushion covered around 13 percent of total liabilities at end-1H16.
Fitch expects some regulatory forbearance to be available for Demir, in case of need, but any extraordinary direct capital support from the Azerbaijan authorities cannot be relied upon, in the agency's view.
Support from the bank's private or IFI shareholders is possible in Fitch's view, but cannot be relied upon in all circumstances.
The rating actions are as follows:
Long-Term foreign currency IDR: downgraded to 'B-' from 'B', maintained on RWN
Short-Term foreign currency IDR: 'B', maintained on RWN
Viability Rating: downgraded to 'ccc' from 'b', maintained on RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
DemirBank, the first commercial bank of Azerbaijan, started to operate in 1989.