Fitch affirmed the ratings of Capital Bank and Pasha Bank at "B +", outlook "Stable"

Fitch Ratings affirmed the long-term Issuer Default Rating ("IDR") in foreign currency Azerbaijani Kapital Bank and Pasha Bank at "B +" with a "stable" outlook.

Long-term and Short-term Capital Bank and its Support Rating and Support Rating Floor reflect the potential for support from the Azerbaijani authorities in case of need. In assessing the capacity to support Fitch takes into account the important social role of the bank in the distribution of pensions through the largest branch network in the country and its active participation in infrastructure development projects funded by the state. The ratings also take into account the strong informal ties between the bank and its shareholders and the government.

At the same time, Fitch continues to regard the probability of government support as only a limited view of the narrow commercial bank's client base, the fact that it is privately owned, and the weak history of providing support to the authorities in the past with respect to the country's largest bank, the International Bank of Azerbaijan (" MBA ", "BB"/ forecast" Stable ").

Stability rating of Capital Bank reflects limited commercial customer base, the weak performance for a long period of weak asset quality, pressure on capital and a significant level of related party lending. At the same time, the rating takes into consideration the significant liquidity in the bank, important to compensate for the volatility of client accounts, related to fiscal transfer payments, and also takes into account the lack of heavy debts in the financial markets (with the exception of funds received from the state). Capital Bank receives funding primarily through customer accounts (42% at the end of 9 months. 2012) and loans from government agencies (57% at the end of 9 months, 2012).

In the last four years (2009-2012) Capital Bank increased its loan portfolio by almost five times, from 345 mln to 1.7 bn, mainly due to the growth of the agency lending (about 66% of the total loan portfolio bank at the end of 9 months, 2012). Agency loans are funded directly by the Azerbaijani authorities and in most cases have the state guarantee. Lending to related parties in the construction sector was 17% of the credits at the end of nine months of 2012.

At the end of 2012, the bank NPLs (loans overdue more than 90 days) were equal to about 22% of gross commercial loans, which is higher than that of other banks in Azerbaijan, rated by the agency Fitch. Further weakening asset quality is possible to meet the increasing credit risk in the loan portfolio of the Bank's Capital with slow amortization.

According to Fitch, the bank could fully cover bad loans reserves according to reports, but in this case the cap would approach the regulatory minimum of 12%. Moreover, the loss absorption capacity remains under pressure due to low / negative generating capital for the bank's profits, as well as the expected growth potential of commercial lending. The new capital contribution in the amount of AZN 10 million, due in 2013, will provide only temporary relief of capitalization, as these funds are likely to go on loan growth and cover operating losses.

Pasha Bank affirmation reflects minor changes in the structure of risk the bank for the time elapsed since the last review in September 2012. Bank's ratings are constrained by high cyclicality and dependence on oil and the structural weaknesses in the operating environment in Azerbaijan. Main areas of difficulty in Pasha Bank remains limited base of retail deposits and short operating history, potential contingent risks associated with building a business group, a significant political risk and uncertainty about the long-term sustainability of significant funding from the bank of a related party.

At the same time, the ratings also take into account the good now financials Pasha Bank, as indicated by a significant stock of capital and substantial liquidity cushion and acceptable today profitability and asset quality. With the latter should be considered in the context of the limited operating history.

As far as Fitch, the bank's shareholder structure may give him an advantage in terms of a potential liquidity support, favorable regulatory approach and the potential capital support when needed. At the same time, according to the agency, this support can not be relied upon at any time within the limitations of the systemic importance of the bank and its role in policy. As a consequence, Support and Support Rating Floor Pasha Bank were affirmed at "5" and "there is no level of support."

Both banks are owned by Pasha Holding, and ultimately controlled by the family Pashayevs related by kinship with President Aliyev. In the case of a weakening of bonds shareholder with the Azerbaijani authorities, it will be a negative point for credit Pasha Bank and Capital Bank. If there is a sharp weakening of the Azerbaijani economy or political stability in the country, for example, at a much lower price of oil, it would also be a negative factor for both banks.

IDRs, Support Rating and Support Rating Floor Levels of Capital Bank can be lowered in case of transfer agent functions to another financial institution. In case of deterioration in asset quality in the future, the commercial capital of the Bank's loan portfolio and / or persistent operating losses, it may affect the bank's capitalization and lead to lower its rating stability. A positive rating action on Capital Bank is unlikely in the foreseeable future given the low profile of the bank and the individual has a substantial capacity to support recorded in the rankings.

Rating pressure Pasha Bank downward may occur in case of a significant deterioration in capitalization and liquidity, for example, as a result of the materialization of contingent risks from other assets or groups because of the rapid growth in lending, which is currently expected by the agency. Support Rating and Support Rating Floor Pasha Bank may be increased in the event of a marked increase in value of the bank to the banking system and expand its client base, or if the Azerbaijani authorities to more clearly demonstrate their commitment to support the country's banks, which are not owned by the state. However, Fitch believes that such changes are unlikely in the near future. A positive rating action would require a long history of good performance, and improve transparency in the construction business group. -15D -