Fitch Ratings has affirmed OJSC Azerbaijan Mortgage Fund's (AMF) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BB+' with Negative Outlooks.
AMF's ratings are equalised with Azerbaijan's sovereign ratings (BB+/Negative), reflecting the entity's strong legal linkage with the republic, strategically important role to the state's housing finance policy and the state's tight state control over AMF's activities. The ratings are also supported by a buy-back guarantee for AMF's bonds provided by the central bank. Fitch views AMF as a credit-linked entity under its "Rating of Public-Sector Entities Criteria".
KEY RATING DRIVERS
Legal Status Assessed as Stronger
Fitch deems AMF's legal links with the state as strong. AMF was established under the presidential decree in 2005. Since mid-2016 its legal status was changed to an open joint stock company, 100%-owned by the state, from a non-commercial entity operating under the central bank. Any potential AMF's reorganisation and liquidation as a state financial institution are subject to a special presidential decree.
Strategic Importance Assessed as Stronger
Fitch views AMF's role as strategically important to the state's housing policy as provision of affordable housing is a high priority for Azerbaijan. Demand for housing is fuelled by a growing population and the continued urbanisation of the country amid aging housing stock. The state makes steady contributions to AMF to support housing affordability in the republic.
AMF acts as a government's agent in promoting subsidised long-term mortgage loans as a means to providing Azerbaijanis with affordable housing. AMF's role is also to channel state funding to national financial institutions, as market-based mortgage securitisation is under-developed in Azerbaijan. AMF's mandate is to issue mortgage bonds, thus providing low-cost funding to local banks, while collateralised loans have to meet AMF's strict standards, reducing credit risk and ensuring the quality of the portfolio.
Control Assessed as Stronger
AMF operates under strong control and oversight from the state. President of Azerbaijan and the government set the fund's strategic objectives, define lending and funding policies and appoint members of AMF's board of directors and supervisory board. The latter has five members, including Deputy Ministers of Economy, Finance and Labour, and also Deputy Head of The State Housing Construction Agency, and Deputy Chairman of Azerbaijan's central bank.
The supervisory board approves AMF's development strategy, annual budget and investment programmes. It monitors the entity's operations, use of budgetary funds, debt levels and liquidity position. AMF's cash account is held in the central bank. AMF's IFRS financial statements are audited by an independent external auditor for no more than three years.
Integration Assessed as Stronger
Fitch views AMF's integration into the general government sector as strong. While AMF's accounts are not consolidated in the central government's budget, AMF benefits from steady equity injections from the state budget and the central bank's buy-back guarantee for its bonds. Since end-2016, AMF is empowered with a right to issue sovereign-guaranteed bonds, which also supports our assessment of AMF's integration with the state as strong.
AMF has been receiving annual state contributions since its establishment. As of end-2016 the cumulative contributions totalled AZN316m and the government has approved an additional AZN50m equity injection in 2017. The central bank's buy-back guarantee provides sound liquidity support to AMF's bonds on the secondary market, which is evident from the central bank's holding of most of AMF's AZN335m outstanding bonds at end-2016.
For 2017, Financial Stability Board, which is governed by Azerbaijan's Prime Minister, has approved a new AZN200m guaranteed bond issue by AMF. Fitch expects that AMF will continue to benefit from state support over the medium term, unless the government changes its social housing funding policy.
Profitability Supported by Low-Cost Funding
Fitch projects AMF to remain profitable over the medium term, in line with its historical trend, which is supported by low-cost funding and the adequate quality of mortgage portfolio. However, Fitch estimates that the return on equity (net income/equity and reserves) ratio could moderately decline to 1.65% from an average 1.97% in 2014-2016 since AMF became an income taxpayer from end-2016.
AMF's operating activities have recovered since end-2016 after almost a full year of sluggish operations brought on by the entity's reorganisation. Fitch projects AMF's mortgage portfolio could grow 30%-40% in 2017 after a slight decline in 2016 (unaudited 2016: AZN539m), supported by an AZN50m equity injection and upcoming AZN200m bond issue.
Distressed Macroeconomic Environment
AMF was negatively affected by the continued recession and subdued economic activities in the country in 2016. This was due to lower oil prices and subsequent manat devaluation, amid continued rebalancing of sovereign finances and a weak banking sector. The government's policy response to the challenging macro environment is still under development, which could impact AMF in the medium term. AMF continues to operate with a narrow planning horizon as a result of a single-year sovereign budgetary framework.
A rating change would be triggered by changes to the ratings of the sovereign.
A weakening of linkages with the government through changes to the legal status of AMF leading to a dilution of control, or reduced state support due to weaker integration with the sovereign could result in the ratings being notched down from the sovereign ratings.
Azerbaijan Ipoteka Fondu