Friday, June 19 2015 06:40

Ardshinbank, which has received a Long- term Issuer Default Rating from Fitch Ratings, has become the only bank in Armenia with assigned ratings from two international rating agencies - Moody's and Fitch.

On June 17, Fitch Ratings published Ardshinbank CJSC's Long-term Issuer Default Rating (IDR) of 'B+' with Negative Outlook. The rating matches the one published for the Armenian Republic, being the highest possible that an Armenian private entity can qualify for.  

Ardshinbank's IDRs are driven by its standalone creditworthiness, as expressed by its 'b+' Viability Rating (VR). The VR considers the high dollarisation of the bank's balance sheet, large loan concentrations and the higher-risk nature of some of the major exposures, rapid recent growth in a fairly high-risk environment and moderate loss absorption capacity relative to regulatory capital requirements. The ratings also reflect the bank's notable domestic franchise (market share of 11.5% in domestic lending), so far reasonable financial metrics, solid IFRS/Basel capital ratios and an adequate liquidity cushion in light of upcoming wholesale debt maturities. 

The bank's Support Rating Floor of 'No Floor' and '5' Support Rating reflect Fitch's view that the Armenian authorities have limited financial flexibility to provide extraordinary support to banks, if necessary, given the banking sector's large foreign currency liabilities relative to the country's international reserves. Potential support from the private shareholders is also not factored into the ratings, as it cannot be reliably assessed.

The Negative Outlook on the bank's Long-term IDR is driven by the weaker operating environment in Armenia, characterised by a stagnating economy (we expect Armenia to fall into a mild recession in 2015), devaluation pressures and higher interest rates. In Fitch's view, this is likely to negatively impact the bank's profitability metrics, capitalisation and asset quality.
The bank's profitability metrics were reasonable in 2014, although the weakening trend reflected both margin compression, due to competition and higher funding costs, and increased loan impairment charges (LICs), in part to cover loan write-offs. Fitch expects profitability metrics to remain under pressure in 2015, mainly due to higher LICs as loans season in a challenging environment. 
At end-1Q15, the share of non-performing loans (NPLs, over 90 days overdue) was a low 2.9% of gross loans, after write-offs (2.9% of average gross loans in 2014) and following lending growth. In addition, restructured exposures accounted for 3.4% of loans, with generally low coverage by loan impairment reserves (LIR). The LIR/NPLs ratio was also moderate at around 65%, reflecting the bank's high reliance on loan collateral.
The loan concentrations are large (the top 25 groups of borrowers comprised 46% of the gross loan book, or 2.4x of Fitch Core Capital, FCC), while some of the major lending exposures, which are not currently in arrears are relatively high risk, in Fitch's view, due to completion and/or business risks. The high share of FX lending (around 60% of the total) poses additional risks, as most of this is issued to unhedged borrowers, whose debt servicing capacity could have been affected by the recent devaluation of the AMD and recessionary environment.

In this context, Fitch views the loss absorption capacity (relative to minimum regulatory capital requirements) offered by the bank's equity cushion (estimated at around 3.8% of end-1Q15 loans) as only moderate. However, annual pre-impairment profit (equal to 4.4% of average gross loans in 2014) offers additional moderate loss absorption. The FCC ratio was a reasonable 17.4% at end-2014 (higher than the regulatory ratio primarily because repossessed collaterals of AMD6bn are deducted from regulatory capital).
At end-1Q15, the share of wholesale funding stood at a significant 38%. The available large liquidity cushion (at around 25% of total assets, largely cash items in foreign currency) was sufficient to cover sizeable refinancing requirements for 2015 (equal to 18% of liabilities), while the bank is looking to diversify its funding structure by source and maturity. 

The bank's performance is sensitive to the performance of the economy and stability of the local currency. The ratings could be downgraded if the weaker operating environment translates into a marked deterioration in the bank's asset quality, performance and capital metrics. A major liquidity shortfall could also cause a downgrade. The stabilisation of the country's economic prospects, and maintenance of the bank's currently sound asset quality and profitability metrics, would reduce downward pressure on the ratings.

To recall, in Feb 2014, Moody's assigned a standalone bank financial strength rating (BFSR) of D-, which maps to ba3 Baseline Credit Assessment (BCA), to Ardshinbank CJSC (ASHIB). The rating was supported by the bank's adequate capitalisation, good profitability and acceptable asset quality. The bank benefited from its extensive branch network, which is one of the largest in Armenia. However, ASHIB's rating was constrained by the bank's exposure to Armenia's undiversified economy. ASHIB's long- term global local currency (GLC) deposit rating of Ba2 benefited from a one-notch uplift from the ba3 BCA based on Moody's assessment of a moderate probability of systemic support for the bank in the event of need. 

According to the Financial Rating of Armenian Banks by the Agency of Rating Marketing Information (ArmInfo), in 2014 Ardshinbank's net profit totaled 4.2 bln AMD ($8.8 mln) and secured the Bank's fourth position in the Armenian banking system. In 2014, the Bank's assets grew by 37%, lending - by 38.5%, liabilities - by 43%. The total capital of the Bank increased by 7.4% in 2014 due to replenishment of the authorized fund.  

Over 2014 the Bank managed to attract additional long-term resources of non-treasury origin from the following financial institutions: CITI syndicated - $18 mln, J.P. Morgan - $75 mln, BSTDB and EDB - $10 mln each. 

In Q1 2015, Ardshinbank increased its net profit more than 6-fold to 783 mln AMD, retaining its position among the TOP 5 banks. In Q1 2015, the Bank was ranked the 2nd in terms of assets, 2nd in lending, and 2nd in general obligations. Over 65% in the Bank's loan book fall on lending to economy sectors, with about 32% being retail lending. In the economy lending portfolio, the share of industry made up 39% (leadership retained), the share of consumer loans was about 28%, with 18% of them being mortgage loans and 30% being credit cards. In Q1 2015, the Bank intensively increased the retail loan portfolio and slackened the growth of corporate lending. 
To note, founded in 2002, Ardshinbank is one of the largest banks of Armenia with a wide branch network (55 branches throughout the country). The majority shareholder of the Bank is "Center for Business Investments" LLC with a 97.52% stake. The number of the Bank's permanent active customers is over 225 thsd.