BAKU, Azerbaijan, December 11
By Tamilla Mammadova – Trend:
Fitch Ratings has downgraded Cartu Bank's Long-Term Issuer Default Rating (IDR) to 'B-" from 'B', Trend reports referring to the Fitch Ratings.
As reported, the downgrade of Cartu's Viability Rating (VR) reflects the further increase in the bank's impaired loans' ratio, and the resulting higher encumbrance of capital by unreserved problem exposures.
The one-notch difference between Cartu's Long-Term IDR (which captures default risk on senior obligations) and VR (which reflects failure risk) reflects the bank's sizable junior debt buffer.
According to Fitch, conversion of this debt into equity may be sufficient to protect senior creditors from losses in case of the bank's failure, although the sufficiency of the buffer would depend on limited further asset quality problems being identified in the loan book.
Cartu's impaired loans were 49 percent of gross loans at end of 1H2019, up from 39 percent at end of 2018. These exposures were weakly covered (27 percent) by loan loss allowances (LLAs), reflecting the bank's strong recovery expectations from collateral.
"Cartu's regulatory impaired loans were also high at 41 percent of end 1H2019 gross loans, moderately lower than under International Financial Reporting Standards (IFRS) as one large problem exposure in the latter accounts was not recognized locally, and are also modestly provisioned by 40 percent," said the report.
Borrower concentrations in the loan book remain high, as the top 25 exposures constituted 63 percent of gross loans at end of 1H2019. Foreign currency lending comprised a high 66 percent of the book at end 1H2019.
Cartu's fixed-charge coverage ratio was 23 percent at end of 1H2019, moderately down from 25 percent at end of 2018. Capitalization should be viewed in light of the bank's large unreserved problem exposures.
"We estimate that Stage 3 loans and other higher-risk loans identified by Fitch and not reported as impaired, net of specific LLAs, were equal to 105 percent of the bank's FCC at end of 1H2019", said the report.
Cartu's main funding source - comprised 74 percent of total liabilities at end of 1H2019. Deposit concentrations are high, as the 20 largest groups of depositors made up 78 percent of the total at the same date. The liquidity buffer was sufficient to repay 22 percent of total customer funding net of near-term non-deposit repayments at end of 1H2019, which is viewed as reasonable by Fitch.
"Cartu's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect the bank's limited systemic importance, and consequently Fitch's view that state support cannot be relied upon," the report said.
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