PASHA Bank highly important for Azerbaijani banking sector

Business Materials 9 December 2016 19:50 (UTC +04:00)
PASHA Bank OJSC has high systemic importance for Azerbaijan's banking sector
PASHA Bank highly important for Azerbaijani banking sector

Baku, Azerbaijan, Dec. 9


PASHA Bank OJSC has high systemic importance for Azerbaijan's banking sector, S&P Global Ratings said in a message Dec. 9.

“We believe that the government [of Azerbaijan] would provide extraordinary support to the bank if needed, considering PASHA Bank's important role of servicing large and mid-size corporates in Azerbaijan and its substantial market share in lending and transfers and payments,” the message said.

S&P Global Ratings affirmed its 'BB-/B' long- and short-term counterparty ratings on Azerbaijan-based PASHA Bank Dec. 9.

“The affirmation reflects our expectation that the bank's asset quality and projected credit losses will be close to the system average and will not materially deviate from those of peers within the next two years,” reads the message.

S&P forecasts economic growth in Azerbaijan of 0.8 percent in 2017, after the recession in 2016.

“The subdued growth will be driven by lower government spending, low oil prices, and the sharp devaluation of the Azerbaijani manat (AZN) in 2015. That said, we expect that economic risks in Azerbaijan will remain high in the next two years. We note that, due to elevated economic risks, banks in Azerbaijan need more capital to cover potentially higher credit losses,” the message said.

S&P analysts have also revised their assessment of PASHA Bank’s capital and earnings to adequate from strong.

“In our view, PASHA Bank's capital position will be pressured and we now forecast that the bank's RAC [risk-adjusted capital] ratio before adjustments for diversification and concentration will decline to 9.1-9.4 percent in the next 12-18 months,” reads the message. “Our RAC forecast reflects heightened economic risks in Azerbaijan, which are reflected in the higher risk-weights we apply to the bank's exposures, and PASHA Bank's weakened ability to build up capital internally because of the aggressive dividend policy pursued by its shareholder.”

S&P has also revised up its assessment of the bank's risk position to adequate from moderate.

In 2015, the bank's nonperforming loans (NPLs; impaired loans) reduced to 36.3 million manats or 3.8 percent of total loans, because some large exposures were recovered, from 61.7 million manats (10.8 percent of loans) as of year-end of 2014, according to S&P.

“In the first half of 2016, NPLs grew to 5.4 percent (similar to the general banking sector trend) but still slightly below the system average,” said the message. “In our view, the bank’s provisioning coverage of NPLs remains adequate with a provisioning coverage ratio of about 120 percent as of June 30, 2016.”

“We also note that single-name concentration in the loan portfolio has improved recently; 20 largest exposures were 46 percent of total loans at June 30, 2016, compared to 62 percent at Dec. 31, 2014,” the message reads.

Although S&P expects that operating conditions for Azerbaijani banks will remain tough in 2017-2018, the ratings agency thinks that the bank's asset quality and credit losses will be in line with the system average indicators.

“We view PASHA Bank's funding as below average and liquidity as adequate,” the agency said. “The bank's funding profile remains highly concentrated with 20 largest depositors accounting for 73 percent of total deposits as of June 30, 2016, and could be vulnerable if a few large deposit withdrawals took place at the same time.”

“Despite the bank's low dependence on wholesale funding and its large liquidity buffers, we view the high concentration of the bank's funding profile as the main constraint on our assessment of its funding and liquidity,” the message reads. “Although we observe that the diversification of the bank’s depositors has been gradually improving in the second half of 2016, we will closely monitor the sustainability of this trend.”

Assessment of PASHA Bank's business position reflects its solid market franchise in corporate banking in Azerbaijan, experienced management team, and supportive shareholders, said S&P.

PASHA Bank was established in 2007. The bank has two subsidiaries – in Georgia and Turkey – PASHA Bank Georgia and PASHA Bank Yatirim Bankasi. PASHA Bank is a part of PASHA Holding.

PASHA Holding is a major investment company in Azerbaijan widely represented in such sectors as banking, insurance, construction, production of construction materials, tourism and other areas of business.

Kapital Bank, one of the largest banks in Azerbaijan’s retail market, is also owned by the PASHA Group of Companies.

(1.743 manats = $1 on Dec. 9)