Moody's Investors Service has today affirmed Azerbaijan -based Kapital Bank OJSC's global local- and foreign-currency deposit rating of B1, which incorporates also affirmed: (1) the E+ standalone bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of b2, and (2) Moody's assessment of a low probability of systemic support, resulting in a one-notch uplift from its BCA of b2. The bank's Not Prime short-term local and foreign currency deposit ratings were also affirmed. All the aforementioned long-term ratings carry a stable outlook. According to Moody's, Kapital Bank's standalone credit strength (i.e., its BFSR/BCA of E+/b2) is constrained by (1) high single-client concentrations and related-party exposure in the loan book; (2) volatile asset quality indicators given exposure to budget-linked projects; and (3) low, albeit gradually improving, profitability. At the same time, the BFSR is supported by the bank's nationwide presence comprising Azerbaijan's largest distribution network, its diversified funding base and adequate capitalisation. Moody's notes Kapital Bank's high single-client loan concentrations, although these concentrations are on a declining trend given the completed and planned capital injections. The bank's top 20 borrowers declined to 359% of Tier 1 capital (247% of Tier 1 excluding loans guaranteed by the government) at 1 October 2013 from around 5x Tier 1 within 2011-12. Moody's expects the bank to report further reduction in this metric driven by the planned capital increase and development of its retail business. The bank's related-party loans accounted for high 21% of the loan book under IFRS as at year-end 2012, reducing to 11% of loans (56% of Tier 1) as of 1 October 2013 according to bank's management data. Kapital Bank's asset quality indicators appear volatile, with a material increase in "past due but not impaired loans" at year-end 2012, more than half of which were repaid within the first three quarters of 2013, with nonperforming loans overdue more than 90 days comprising 10.5% of total loans as of 1 October 2013 according to bank's management data. This volatility was mainly caused by technical delinquencies of government-related projects linked to budget allocation, and Moody's expects this volatility to persist given the bank's focus on large-scale government-related projects, which account for around 43% of loan book. At the same time, Moody's believes that credit quality should be supported by the currently favourable operating environment in Azerbaijan (Baa3, stable) -- with non-oil GDP rising by over 9% for the first three quarters of 2013. Kapital Bank's profitability has been historically low, constrained by narrow net interest margin (NIM: 1.6% at year-end 2012 under IFRS) given the bank's focus on low-yielding government related projects. Moody's expects Kapital Bank's core banking profitability and NIM to improve given active development of retail lending among payroll clients, which more than doubled within the first three quarters of 2013. Kapital Bank's good market position ranking the third largest bank by assets in Azerbaijan is underpinned by historical links and close ties to the government, as well as its branch network (the largest countrywide) and wide customer franchise. These factors support the bank's diversified funding profile with the high share of retail deposits (40% of liabilities) and government-related funding (37.8%). Kapital Bank's currently good capitalisation was recently supported by capital injection from shareholders -- Pasha Holding -- totalling AZN30 million ( $38 million ) in July 2013 , which increased the regulatory Tier1 capital adequacy ratio to 18.2% at 1 October 2013 from 12.1% at year-end 2012, and the total capital adequacy ratio to 22.16% as of 1 October 2013 from 14.68% at year-end 2012 (vs the regulatory minimum ratio of 6% for the Tier 1 capital adequacy ratio and 12% for the Total capital adequacy ratio). Shareholders appear to be committed to support bank's capitalisation in the future, with another Tier 1 capital increase planned for Q1 2014.
Most Popular Stories
- Obama Administration Releases Proposal to Regulate For-Profit Colleges
- Apple, HP, Intel May Take a Hit from Slowdown in Smartphone Sales Growth
- Elizabeth Vargas' Husband Marc Cohn Addresses Rumors
- Keurig Adds Peet's coffee, Alters Starbucks deal
- U.S. to Relinquish Gov't Control Over Internet
- Motley Crue's Nikki Sixx Marries Model Courtney Bingham
- FDIC Files Lawsuit on Behalf of Banks Allegedly Hurt by Libor Scandal
- Chinese e-Commerce Giant Alibaba Gears for IPO in U.S.
- Some California Cities Seeking Water Independence
- Quiznos Files for Chapter 11