Fitch Rates Pasha Bank 'B+'; Outlook Stable
September 19, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-19 September 2012: Fitch Ratings has assigned Azerbaijan-based Pasha Bank (PB) a Long-term Issuer Default Rating (IDR) of 'B+' with a Stable Outlook. A full list of rating actions is at the end of this comment.
RATING ACTION RATIONALE: IDRs AND VIABILITY RATING (VR)
PB's IDRs and VR reflect the high-risk Azerbaijan operating environment; the bank's limited franchise and short track record; potential contingent risks arising from the construction business of the broader group; considerable political risk and uncertainty with respect to the long-term sustainability of the bank's sizeable related party funding; and significant balance sheet concentrations.
At the same time, the ratings also consider PB's currently solid financial metrics, reflected in a sizable capital buffer, considerable liquidity cushion and reasonable performance. PB's credit profile has also benefited to date from the bank's powerful shareholder in terms of capital injections and access to funding.
RATING ACTION RATIONALE: SUPPORT RATING AND SUPPORT RATING FLOOR (SRF)
The '5' Support Rating and 'No Floor' SRF reflect Fitch's view that support for PB from the Azerbaijan authorities and/or its owner cannot be relied upon. This in turn reflects the bank's still limited systemic importance, the considerable delays in providing capital support to majority state-owned International Bank of Azerbaijan ('BB+'/RWN), and PB's potentially high exposure to any changes in the political landscape in Azerbaijan (albeit Fitch does not currently expect such changes).
At the same time, Fitch acknowledges that the bank's shareholder structure may benefit the bank in terms of potential liquidity support and favourable regulatory treatment. PB is owned by Pasha Holding and ultimately controlled by Arif Pashaev, the father in-law of the current President Aliyev.
RATING DRIVERS: IDRs AND VR
Reported loans overdue by 90 days or more (non-performing loans, NPLs) stood at 10% of the portfolio at end-2011, which is significant considering recent rapid growth and the relatively unseasoned nature of the book. However, NPLs were 90% covered by loan impairment reserves, and Fitch's review of PB's largest exposures suggests their quality is reasonable relative to privately-owned peers.
PB's loss absorption capacity is currently substantial. At end-Q112, PB could have reserved just over half its loan book without breaching minimum regulatory capital requirements. Fitch estimates that the regulatory capital adequacy ratio of 37% at end-H112 is likely to gradually decrease to around 15% over four to five years, given anticipated 20%-25% annual loan growth rates and current internal capital generating capacity of 10%.
Fitch notes sizeable contingent risks resulting from the shareholder's construction business, which is viewed by the agency as currently more important for Pasha Holding, than the group's banking business. Although PB does not finance much of shareholder's construction activities at present (related party lending was a moderate 15% of end-2011 Fitch core capital), the agency is concerned that PB's current capital and liquidity buffers could weaken if PB is forced to considerably increase its exposure to related party construction activities. PB's sister bank, Kapital Bank ('B+'/Stable/'b-'), which is also owned by Pasha Holding, currently has substantial exposure to the group's construction projects.
PB's funding is dominated by related party placements made by other companies of Pasha Holding (17% of end-2011 liabilities) and family members of the controlling shareholder (32%). Some of these placements are interest-free and result in a low average cost of funding (3.5% in 2011), which contributes to PB's bottom line. Fitch cannot reliably assess the longer-term sustainability of these funds, and expresses concerns that the bank's financial position in terms of both liquidity and profitability would weaken if they are withdrawn. PB may find it difficult to replace them with local retail funding due to the absence of a branch network. At the same time, the bank keeps a sizeable liquidity buffer in the form of sovereign bonds, equal to 50% of liabilities at end-2011, which exceeds the amount of potential deposit outflow. PB's liquidity also benefits from the absence of material wholesale funding.
RATING SENSITIVITIES: IDRs AND VR
Downside pressure on PB's ratings could arise if the capital and liquidity positions are substantially eroded, for example as a result of very rapid growth or materialisation of contingent risks from other group assets, or if credit underwriting standards and/or asset quality markedly deteriorate. A sharp weakening of the Azerbaijan economy or the country's political stability, for example in case of a much lower oil price, would also be negative.
Near-term upside potential for PB's ratings is limited. However, an extended track record of sound performance, greater diversification of the bank's franchise and improved transparency of the group's construction business would be credit positive.
RATING SENSITIVITIES: SUPPORT RATING AND SRF
The Support Rating and SRF could be upgraded if there was a marked increase in PB's systemic importance and the depth of its franchise, or if the Azerbaijan authorities more clearly demonstrate their readiness to support the country's non state-owned banks. However, Fitch views such changes as unlikely in the near term.
The rating actions are as follows:
Long-term foreign-currency Issuer Default Rating (IDR): assigned 'B+'; Outlook Stable
Short-term foreign-currency IDR: assigned 'B'
Viability Rating: assigned 'b+'
Support Rating: assigned '5'
Support Rating Floor: assigned 'No Floor'
Company — PASHA Bank
Full namePASHA Bank