Fitch Ratings-London/Moscow-17 May 2012: Fitch Ratings has downgraded Azerbaijan-based Technikabank's (TB) Long-term Issuer Default Rating (IDR) to 'CC' from 'B-' and Viability Rating (VR) to 'f' from 'b-'. A full list of rating actions is at the end of this commentary.
The downgrade of TB's Long-term IDR reflects further deterioration in the bank's liquidity position as a result of continued deposit outflows (see 'Fitch Places Technikabank's Ratings on RWN', dated April 4 at www.fitchratings.com) and a sharp reduction in the bank's capital ratio.
As at May 11, 2012, individuals' deposits had dropped by 55% compared to mid-March 2012, and the cash buffer had thinned to just AZN12m (equal to 2.5% of the bank's liabilities). In Fitch's view, TB's tight liquidity gives rise to considerable uncertainty about its current capacity to service its financial obligations.
The regulatory capital adequacy ratio fell to just 2.1% at end-April 2012 (from 16% at end-March 2012), driven by a large AZN60m of new loan impairment provisions created following a change in the bank's management, instigated by the Central Bank of Azerbaijan (CBA).
The downgrade of TB's VR to 'f' reflects Fitch's view that the bank has failed, given its weak liquidity and capital positions, and the fact that these have already required some form of external support or regulatory forbearance. TB's liquidity position has benefited from an AZN18m facility (an amount which exceeds the bank's current liquid assets) received from state-controlled International Bank of Azerbaijan (IBAR, 'BB+'/Rating Watch Negative), and a waiver from the CBA in respect to the breach of capital requirements has been received.
Fitch views further external support for TB as highly uncertain. Management has informed Fitch that the bank's controlling shareholder, World Wines, plans to inject new equity into the bank in the near-term. However, the absence of capital support to date, the lack of transparency in respect to ultimate control of the bank and the reported recent arrest of one of the bank's key shareholders (see Fitch's comment of April 4) mean that such support cannot be relied upon, in the agency's view. Support for TB from the Azerbaijan authorities is possible, but also highly uncertain given the apparent complications in relations between the authorities and one of the bank's shareholders, and the recent prolonged delays with the recapitalisation by the Azerbaijan authorities of IBAR.
TB's Long-term IDR could be downgraded to 'D' or 'RD' (Restricted Default) if liquidity tightens further and it becomes clear that the bank is no longer able to service its current obligations. The Long-term IDR and VR could be upgraded if TB receives substantial external support, to the extent that Fitch views the bank once more as a viable entity.
The rating actions are as follows:
Long-term IDR: downgraded to 'CC' from 'B-', off Rating Watch Negative (RWN)
Short-term IDR: downgraded to 'C' from 'B', off RWN
Viability Rating: downgraded to 'f' from 'b-', off RWN
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'