Wednesday, September 19 2012 15:30
Moody's Investors Service has changed the outlook to negative from stable on Armeconombank's (AEB) B1 local and foreign-currency deposit ratings
ArmInfo. Moody's Investors Service (London) changed the outlook to negative from stable on Armeconombank's (AEB) B1 local and foreign-currency deposit ratings, on September 18.
Ratings Rationale: Moody's change of outlook on the bank's ratings reflects the increasing negative pressure on its operating efficiency and profitability. Despite good revenue generation as reflected in its strong and growing net interest and fee incomes, AEB has experienced significant deterioration in the bottom line profitability due to about 50% increase in operating expenses in the past four years as the bank invested in modernising its branches. Consequently, the bank's cost-to-income ratio has weakened during this period and reached 97% at end-H1 2012, according to AEB's regulatory reports. The growing operating costs resulted in material deterioration of the bank's profitability with a small loss of AMD41.5 million ($0.1 million) reported for H1 2012. This led the Return on Assets (RoA) declining to -0.14% at end-H1 2012 from 0.84% at end-H1 2011.
Moody's understands that AEB's management is undertaking a cost-cutting plan with the aim of improving its operational efficiency. As a result the bank expects to notably improve its efficiency, and thus profitability indicators over the next several quarters. The extent of these plans' realization would be a key factor for positioning the bank's ratings in the short-to-medium term.
AEB's capitalisation is currently acceptable with equity-to-assets ratio of 15% at end-H1 2012, according to AEB's regulatory reports. However, weak internal capital generation, if not reversed, could require external capital injection in the medium-term. According to Moody's, AEB's standalone E+ bank financial strength rating (BFSR), which maps to b1 on the long-term scale also reflects the bank's strong liquidity, decent asset quality and limited franchise.
What could move the ratings up/down: The bank's ratings have limited upside potential currently as reflected in the negative outlook. However, a change in the outlook to stable could be prompted by a material improvement in the bank's operating efficiency and profitability, coupled with strengthened market position. AEB's ratings may be downgraded if its efficiency and profitability do not improve significantly in the medium-term. Any increase in related party lending may also have negative implications for the bank's ratings.
By data of AEB, assets of the bank totaled 59.771 bln drams (nearly $143 mln) as of July 1 2012, capital totaled 8.981 bln drams ($21.5 mln), statutory capital totaled 2.333 bln drams ($5.6 mln), and general obligations totaled 50.8 bln drams ($121.5 mln). The bank suffered 41.525 mln drams loss ($99.3 thousand) for the first half of 2012/ Credit exposures of the bank totaled 32.7 bln drams, with 35.1 bln drams inter-bank loans (nearly $84 mln). Financing of economy sectors made up nearly 52% of the bank loan book, with personal loans exceeding 41% of total. Time deposits totaled 18.4 bln drams (mainly personal deposits), with call liabilities totaling 15.9 bln drams (mainly corporate ones). AEB is traditionally among top five banks in terms of the number of branches i.e. 39 branchesL by 19 in Yerevan and in the regions and 1 in NKR.
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