RA Moody's assigns first-time B3 rating to Belarus's Delta Bank; outlook negative
December 19, 2014
Moody's Investors Service has today assigned the following first-time ratings to Delta Bank (Belarus): B3 long-term local-currency deposit rating; Caa1 long-term foreign-currency deposit rating; Not Prime short-term local- and foreign-currency deposit ratings, and standalone E+/negative bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of b3. All the bank's long-term deposit ratings carry a negative outlook.
The rating action is based on Delta Bank's audited IFRS accounts for 2013, 2012 and 2011, statutory accounts as at Q3 2014, and information provided by the bank's management.
Delta Bank's ratings carry a negative outlook which reflects adverse effects on asset quality that could be caused by the weak operating environment in Belarus (as reflected in the negative outlook on the B3 sovereign bond rating).
According to Moody's, Delta Bank's ratings are constrained by the following: (1) the bank's narrow franchise (consumer lending) which is sensitive to the volatile domestic economic environment; (2) potential growth in the volume of problem loans caused by seasoning of the bank's retail loan portfolio; (3) the bank's vulnerable liquidity profile, (4) the bank's weak capital levels; and (5) its modest profitability.
However, the above-mentioned risks are partially offset by (1) Delta Bank's adequate asset quality to date; and (2) its low single-name concentration both in the loan portfolio and in the deposit base.
Moody's notes that Delta Bank's business concentration in consumer lending (which accounted for around 77% of the gross loan book as at year-end 2013) exposes the bank to macroeconomic pressures, such as economic slowdown in Belarus and likely repercussions of the economic recession anticipated in Russia. These risks may lead to weakening creditworthiness of Belarus households and should be considered in conjunction with the bank's unseasoned retail loan portfolio given the recent aggressive growth in consumer lending. The bank's gross loan book grew by 75% in 2013 and 108% in 2012 (not adjusted for inflation), which also led to a 64% increase in its assets in 2013 (2012: 57%).
The aforementioned substantial growth in Delta Bank's loan portfolio will likely require additional provisioning in order to absorb losses, particularly in the consumer lending segment. Moody's notes that the bank's share of non-performing loans (defined as 90+ days overdue) stood at a very low 0.4% of its gross loan book as at year-end 2013, thus further enhancing the bank's good asset quality, while its loan loss provisions also remain adequate (4.3% of gross loans as at year-end 2013). Nevertheless, the rating agency anticipates deterioration in this metric in the short-to-medium term rating horizon.
The rating agency also notes that Delta Bank's modest capital buffer (regulatory capital adequacy ratio of 10.2% posted as at 1 November 2014) is very close to the regulatory minimum of 10%, thus indicating the bank's low capacity both to further enhance its balance sheet and to absorb potential significant deterioration of the loan portfolio. In this regard, Delta Bank will fully rely on its internal capital generation capacity, which will render the bank's profitability metrics increasingly important for its credit profile.
Delta Bank's earnings are modest, albeit improving over the period spanning 2013-14, with return on average assets (ROAA) accounting for 3.4% in 2013 (2012: -0.2%), and the bank expects its net income for 2014 and 2015 to remain in line or marginally lower compared with 2013 levels. Nevertheless, the bank's plans regarding earnings generation could also be disrupted by growing pressure from the domestic operating environment, both in the retail lending and in the corporate segments, as well as intensifying competition in both segments.
Moody's notes that Delta Bank's liquidity profile is volatile, reflecting tight liquidity conditions in the domestic interbank and security markets, and the bank's exposure to foreign-currency-denominated liabilities (around 41% of total liabilities at year-end 2013), which may experience pressure in the event of any external shocks. The aforementioned challenges are partially mitigated by Delta Bank's moderate single-name concentration in both loan portfolio and deposit base, as its exposure to the five largest borrowers totalled around 121% of statutory Tier 1 at year-end 2013, while its top 20 customers represented only around 18% of the customer base.
WHAT COULD MOVE THE RATINGS UP / DOWN
Upwards pressure on Delta Bank's BCA and deposit ratings is limited because of the high-risk operating environment in Belarus. Nevertheless, positive rating adjustments may develop from positive changes in the sovereign rating or outlook, as well as improvements in the bank's capital buffer, coupled with appropriate asset quality and sustained improvements in profitability.
Negative pressure could be exerted on Delta Bank's ratings in the event of (1) weakening of the bank's liquidity profile; (2) weakening of the bank's asset quality; and (3) any further deterioration in its capitalisation metrics.
Company — Delta Bank (Belarus)
Full nameDelta Bank (Belarus)