Moody's Investors Service, ("Moody's") has today upgraded the long-term local and foreign-currency deposit ratings of Armenia's Unibank OJSC (Unibank) to B2 from B3 and changed the outlook on the deposit ratings to stable from positive.
The rating agency has also upgraded Unibank's baseline credit assessment (BCA)/adjusted BCA to b3 from caa1. Concurrently, Moody's affirmed the bank's Counterparty Risk Assessment (CR Assessment) of B2(cr)/Not Prime(cr) and its short-term local and foreign-currency deposit ratings of Not Prime.
The upgrade of Unibank's deposit ratings is driven by the recent strengthening of its capital position, as a series of capital injections increased the bank's total regulatory capital by 68% in 2016 compared to year-end 2015. As a result, as of 1 January 2017, Unibank reported a regulatory capital adequacy ratio of 17.38%, well above the required minimum of 12%, and its cushion against potential credit losses has strengthened accordingly. Moody's estimates that Unibank's ratio of problem loans to the sum of tangible common equity and loan loss reserves was 59% as of year-end 2016, compared to 100% as of year-end 2015.
The recent trends in Unibank's asset quality, profitability and funding structure were also moderately positive and supportive of the ratings upgrade. Moody's estimates that the proportion of problem loans has declined to approximately 18% as of year-end 2016 from 20% a year ago, with the improvement driven by Unibank repossessing collateral held against some of its largest problem loans. The bank's pre-provision income increased to 2.3% of average assets in 2016 from 1.6% in 2015, driven by strong growth of fee and commission income. Finally, Unibank's reliance on market funding has reduced considerably, as the bank channeled new equity funding to repay interbank loans.
Although Unibank's financial metrics substantially improved following the capital increase, Moody's sees downside risks to the bank's enhanced capital position stemming from (1) the gap between problem loans and loan loss reserves, which remains material at more than 40% of the bank's shareholders' equity, and (2) Unibank's significant non-core assets, which include collateral repossessed from some large problem borrowers and amount to 20% of its equity as of year-end 2016.
Moody's assesses the likelihood of government support to Unibank as moderate. As a result, the bank's B2 deposit ratings incorporate one notch of government support uplift from its BCA of b3.
WHAT COULD MOVE THE RATINGS UP/DOWN
Material improvements to the bank's asset quality and profitability would be credit positive for Unibank's BCA.
Negative pressure on the ratings could develop if Unibank's asset quality deteriorates further, eroding the bank's capital cushion. A material weakening of the bank's market positions, leading Moody's to revise its assessment of the Armenian government's willingness to support Unibank, would also negatively affect the bank's deposit ratings.
Unibank has been in the market for over 14 years. Today, Unibank is one of the largest credit organizations of Armenia, implementing classical banking standards and cutting-edge technologies in its w...