Fitch Assigned Rating B+ to Pasha Bank, Outlook Stable

Fitch Ratings has assigned Pasha Bank, Azerbaijan, the long-term Issuer Default Rating ("IDR") at "B +" with a "stable" outlook.

According to the agency, IDR and stability rating Pasha Bank reflect the high risk operating environment in Azerbaijan, a limited customer base and a little history of the bank, potential contingent risks associated with the construction business a larger group, a significant political risk and uncertainty about the long-term sustainability of significant funding received by the bank from related parties, as well as a significant concentration balance.

At the same time, the ratings take into account the well now its financial statements, as indicated by a significant stock of capital, a substantial liquidity cushion and acceptable profitability. To date, a favorable factor for the creditworthiness of the bank is also contributions of capital and access to funding provided by its influential shareholder.

Support rating of "5" and Support Rating Floor 'No Floor' at Pasha Bank reflect Fitch's view that the support of the Azerbaijani authorities and / or the owner of the bank should not be relied upon. This view, in turn, reflects the still limited systemic importance of the bank, significant delays in providing capital support in the case of the International Bank of Azerbaijan ("IBA", "BB +" / Rating Watch "Negative '), which is majority state-owned, and the potentially high risks Pasha Bank in the event of any changes in the political environment in the country (although at present Fitch does not expect such changes).

At the same time, Fitch recognizes that the structure of the share capital of the bank can be a positive factor in terms of the potential liquidity support and favorable regulation. Pasha Bank is owned by Pasha Holding, and ultimately controlled by Arif Pashayev, father-in-law of the Azerbaijani President Aliyev.

Reported loans overdue by 90 days or more (NPLs) accounted for 10% of the portfolio at the end of 2011, a significant level, with the recent rapid growth and the relative immaturity of the loan portfolio. However, the bad loans had coverage provisions for impairment at a level of 90%, and the analysis conducted by Fitch largest bank loans points to their acceptable quality with respect to comparable private banks.

The ability to absorb losses Pasha Bank is now substantial. At the end of Q1, 2012 the bank could provide an allowance for a little more than half of the loan portfolio, without violating the minimum regulatory requirements for capitalization. According to Fitch, the regulatory capital adequacy ratio of 37% at the end of the 1st half of 2012 is likely to gradually decrease to about 15% in the next four to five years with the expected annual growth rate of loans to 20% -25% and the existing capacity to generate capital from its own sources to 10%.

Fitch notes the significant contingent risks from the construction business of the shareholder, which is seen as the agency is now more important to the Pasha Holding, than the banking group. While Pasha Bank to date does not provide significant funding construction activities shareholder (related party lending was moderate at 15% of capital methodology Fitch at the end of 2011), the agency is concerned the possibility of easing the existing stocks of capital and liquidity Pasha Bank, if the bank will have to significantly increase lending to related parties of the construction business. Nurse Bank Pasha Bank, Capital Bank ("B +" / forecast "Stable" / "b-"), which is also owned Pasha Holding, currently has significant risks for construction projects of the group.

In the structure of funding Pasha Bank dominated advances to related parties - other companies Pasha Holding (17% of total liabilities at the end of 2011) and the family of the controlling shareholder (32%). Some of these locations are interest free and cause a lower average cost of funding (3.5% in 2011), which contributes to a net profit of Pasha Bank. Fitch can not confidently assess the longer-term sustainability of these resources and expresses concern that the financial position of the bank in terms of both liquidity and profitability weakened in the event of their withdrawal from the bank. For Pasha Bank it may be difficult to replace these funds to local retail funding in the absence of the branch network. At the same time, the bank has significant liquidity reserve in the form of sovereign bonds, equal to 50% of total liabilities at the end of 2011, which exceeds the amount of the potential outflow of deposits. Positive factor for liquidity is also a lack of substantial funding Pasha Bank, raised on the financial markets.

Downward pressure on the ratings Pasha Bank may occur in case of a significant weakening of capitalization and liquidity, for example, as a result of very rapid growth or expressions of contingent risks from the other assets of the group, or in the event of a significant deterioration in credit underwriting standards and / or quality of assets. 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.

Potential to improve ratings Pasha Bank in the short term is limited. At the same time, over a long history of good profitability, the greater diversification of the bank's client base and improving the transparency of the construction business would be positive aspects to creditworthiness.

Support Rating and Support Rating Floor may be increased in the event of a marked increase in value Pasha Bank for the banking system and the scope of its client base, or if the Azerbaijani authorities to more clearly demonstrate their commitment to support the country's banks, which are not the property of the state. At the same time, Fitch views such changes as unlikely in the short term. -15D -