Fitch Ratings-London-06 August 2013: Fitch Ratings has upgraded JSC Basisbank's (BB) Long-term Issuer Default Rating (IDR) to 'B' from 'B-'. The Outlook is Stable. A full list of rating actions is at the end of this rating action commentary.
Fitch Upgrades Georgia's Basisbank to 'B'; Outlook Stable
Thursday, August 8
KEY RATING DRIVERS: IDRS AND VIABILITY RATING
The upgrade reflects BB's reasonable financial metrics following its acquisition by the Chinese Hualing Group (HG) in 2012 and particularly solid capitalisation after HG made a USD30m equity injection in May 2013. However, the ratings also consider the fairly high-risk operating environment in Georgia and the potentially high volatility of BB's performance and credit losses through the cycle. BB's ratings also reflect the high share of foreign currency denominated lending (80% of the end-H113 loan book), which is typical for the Georgian banking sector, planned fast loan growth (management targets 40%-50% per annum) and limited track record after the acquisition by HG.
BB's capital position was solid at end-H113, with the regulatory capital adequacy ratio standing at a high 36%. Fitch estimates that BB will consume its currently high capital buffer by end-2016 if it achieves its fast planned loan growth of around 50% per annum, and a return on average equity of 10%.
BB's loan quality is currently satisfactory, with NPLs (non-performing loans, 90 days overdue) accounting for a low 2.1% of the portfolio at end-Q113. Reported related party lending is low, and according to Fitch's review of BB's largest loan exposures, the quality and/or collateralisation of the latter is reasonable. However, BB's ability to grow much faster than the market but maintain adequate quality of lending is yet to be tested.
BB's performance (ROAE of 9% in 2012) is improving, supported by a solid net interest margin of 7% in 2012 (albeit pressured by sector-wide margin compression) and better efficiency due to larger scale. Pre-impairment profit equalled 8.5% of average gross loans in 2012, indicating significant loss absorption capacity through the income statement.
BB's cushion of liquid assets equalled a high 47% of end-H113 total liabilities following the equity injection and strong deposit growth (60% during H113). Fitch understands that liquid assets are likely to be partially channelled into new lending, and views BB's liquidity profile in the context of lumpy customer funding (the 20 largest customers accounted for a high 33% of end-2012 liabilities) and medium- to long-term loan book, which is largely exposed to project finance lending.
RATING SENSITIVITIES - IDRS and VR
Downside pressure on the ratings could arise if there was marked asset quality deterioration in the rapidly expanding loan book or related party lending increases significantly. The ratings could also be downgraded if there was a marked deterioration of the operating environment should this result in significant liquidity outflow and/or asset quality erosion.
A further upgrade of BB's ratings is unlikely in the near term. However, an extended track record of resilient asset quality and reasonable financial metrics would be credit positive.
KEY RATING DRIVERS - SUPPORT RATING AND SUPPORT RATING FLOOR
BB's Support Rating has been affirmed at '5' and its Support Rating Floor at 'No Floor', indicating the agency's view that support from the Georgian authorities is uncertain, given the bank's small share of banking system assets (around 2% of end-H113).
RATING SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
An upgrade of these ratings based on sovereign support would probably require a marked increase in market shares and systemic importance. An upgrade of the Support Rating based on possible support from HG is unlikely, given the group's relatively small size and lack of track record in Georgian banking sector.
The rating actions are as follows:
Long-term foreign currency IDR upgraded to 'B' from 'B-' ; Outlook Stable
Short-term foreign currency IDR affirmed at 'B'
Viability Rating upgraded to 'b' from 'b-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'