Moody's Investors Service has today downgraded Joint Stock Commercial Bank Respublika's (Bank Respublika) long-term foreign- and local-currency deposit ratings to Caa1 from B3. The bank's baseline credit assessment (BCA) and adjusted baseline credit assessments were downgraded to caa1 from b3. The outlook on the long-term local- and foreign-currency deposit ratings remain negative, APA reports quoting Moody’s Investors Service.
The bank's Not-Prime short-term foreign-currency and local-currency deposit ratings were affirmed. Concurrently, Moody's has downgraded the bank's long-term Counterparty Risk Assessment (CR Assessment) to B3(cr) from B2(cr) and affirmed its short-term CR Assessment of Not Prime(cr).
Moody's Investors Service has today also downgraded OJSC Bank of Baku's (BoB) long-term foreign- and local-currency deposit ratings to Caa3 from Caa1. The bank's baseline credit assessment (BCA) and adjusted baseline credit assessments were downgraded to caa3 from caa1. The outlook on the long-term local- and foreign-currency deposit ratings remain negative.
The bank's Not-Prime short-term foreign-currency and local-currency deposit ratings were affirmed. Concurrently, Moody's has downgraded the bank's long-term Counterparty Risk Assessment (CR Assessment) to Caa2(cr) from B3(cr) and affirmed its short-term CR Assessment of Not Prime(cr).
The rating action reflects Moody's concerns regarding the depletion of the bank's equity as a result of heavy net losses, and the need for equity injection to meet the regulatory capital requirements. The negative outlook is driven by downside risks for the bank's financial standing stemming from ongoing net losses and weak pre-provision income.
BoB reported a negative tangible common equity of AZN4.9 million at the end 2016 under IFRS (unaudited report) as per Moody's estimates. This was largely driven by heavy credit costs in 2015-16. Over the first eleven months of 2017 the bank recognized a net loss of AZN35.2 million, according to its local GAAP accounts, due to elevated provisioning charges, along with weakened pre-provision income. This caused regulatory capital falling to AZN24.8 million as of 1 December 2017, which is below the minimal regulatory threshold of AZN50 million. In addition, regulatory Tier 1 and Total Capital Adequacy Ratios (CAR) fell to 3.8% and 7.3%, respectively below the required 5% and 10% as of the same date. The bank has informed Moody's that it is currently under regulatory forbearance until further notice.
Despite the shareholders' decision to increase the bank's equity by AZN91 million, taken at the general meeting in June 2017, no capital has been injected to date by the shareholders. The rating agency is not aware of the shareholders' definitive plans and the timing of any support for BoB, or plans to merge it with other local banks.
Moody's expects that BoB will remain loss-making in the next several quarters, and consequently, it needs an equity injection to meet the regulatory requirements. In addition, the business model of BoB and several other banks, focused on high-risk, unsecured consumer lending, is not sustainable in the current environment as the debt servicing capacity of households remains weak. This partially explains the regulatory forbearance measures applied to a few local banks, which solvency materially suffered over the recent challenging years.
The rating action is driven by weak solvency of the bank, in particular owing to material erosion of the bank's capital and ongoing net losses, as well as the need for an equity injection to meet regulatory capital requirements.
The downgrade of credit ratings is driven by the bank's weaker solvency position. The bank reported a very low 4.7% tangible common equity to risk-weighted assets ratio as of year-end 2016 under IFRS as per Moody's estimates, compared to 8.7% in 2015. The drop in the capital ratio was driven by large loan provisioning charges.
Amid continued losses through 2017, its regulatory capital decreased to AZN39.8 million as of 1 December 2017, which is below the minimal threshold of AZN50 million. The bank currently operates under regulatory forbearance and its shareholders are discussing capital replenishment plans including AZN10 million additional share issue. Moody's believes it may materialize early next year, if approved by the shareholders.
Moody's expects that the bank's internal capital generation capacity will remain weak in the next several quarters owing to loan book deleverage. The gross loan portfolio as of 1 December was 17% below the level reported at the end of 2016, although since recently it has stabilized and returned to growth. The net interest income accounted for just 24% of net revenue over the first 11 months of 2017 under local GAAP. Moody's believes that volatile non-interest income will restrain recovery of the bank's profitability in the next 12-18 months, which is captured by the negative outlook on the ratings.
The bank's non-performing loans (NPL) overdue by more than 90 days accounted for 8.9% of gross loans at the end of 2016 and restructured loans comprised another 20% according to bank's audited IFRS report. Loan loss reserves at 8.8% of gross loans fully cover NPLs, but provide only limited coverage of restructured loans suggesting additional provisioning might be required in the next 12-18 months.
The bank held strong liquidity cushion with cash, cash equivalents and due from banks accounting for 56% of total assets as of 1 December 2017. Excluding due to financial institutions its adjusted liquid asset ratio amounted to 28% of balance sheet, which is considered robust by the rating agency.