Saturday, February 10 2024 01:31

Fitch upgrades ACBA Bank to `BB-`; Outlook stable

Fitch upgrades ACBA Bank to `BB-`; Outlook stable

ArmInfo.Fitch Ratings has upgraded ACBA Bank Open Joint-Stock Company's (ACBA) Long-Term Issuer  Default Rating (IDR) to 'BB-' from 'B+', and the bank's Viability Rating (VR) to 'bb-' from 'b+'. The Outlook is Stable. The Fitch Ratings press release received by ArmInfo reads.

A full list of rating actions is below.

The upgrade reflects sustainable, considerable improvements in the  bank's operating profitability and capitalisation for 2022-2023. This  is primarily driven by Armenia's buoyant economic growth, a  strengthened sovereign credit profile, and resilient local currency,  aided by the positive effects of migration from Russia. These factors  have supported key credit ratios of local banks (including ACBA) at  above historical-average levels with reasonable stability. Therefore,  we have also revised up the banking sector's operating environment  score to 'bb-' from 'b+'.

KEY RATING DRIVERS

ACBA's Long-Term Foreign-Currency IDR reflects its intrinsic  creditworthiness, as underlined by its 'bb-' VR. The rating also  reflects the bank's notable franchise in high-risk lending to  individual farmers, which is counterbalanced by solid core capital  ratios and robust profitability.

Solid Economic Growth: The operating environment for Armenian banks  is supported by the country's strong economic growth. Fitch estimates  the country's GDP growth at a strong 7.4% in 2023 (2022: 12.6%) and  forecasts further robust growth of 6.0% in 2024. We believe increased  business activity will continue to support the sector's performance  at a new, above historical average level, and mitigate asset-quality  risks.

Moderate Franchise: ACBA, the fourth-largest Armenian bank, focuses  on agriculture, retail and SMEs, though with limited pricing power  and a sizeable 12% loans share in a fragmented and competitive  market. The performance of its traditional-banking franchise is  highly correlated with economic cycles.

Focus on High-Risk Retail: ACBA has a significant loan exposure to  inherently high-risk individual farmers and consumer finance  (combined 38% of gross loans at end-2023) and SMEs (39%). ACBA's  heightened risk appetite is mitigated by lower-than-average loan book  dollarisation (end-2023: 28%) and high portfolio granularity with  large corporates at only 13% of the loan book.

Asset-Quality Metrics Improved: Credit risk mainly stems from ACBA's  loan book (69% of assets at end-2023). The impaired loans (Stage 3  plus purchased or originated credit-impaired) ratio was a low 2.6% at  end-2023 (end-2022: 2.8%) due to low impaired loan generation and  heightened lending growth in 2023 (17%). Coverage of impaired loans  by total loan loss allowances (LLAs) was a modest 43% at end-2023.  However, net impaired loans made up a limited 6% of Fitch core  capital (FCC).

Performance Strengthened: Annualised operating profit increased to  around 5% of risk-weighted assets (RWAs) in 2022-2023, from 2.5% in  2021. This was mainly driven by additional income earned on  currency-conversion operations in 2022 and wider margins given higher  interest rates in 2023. We expect ACBA's profitability to remain  stronger than the historical average on the back of an upbeat  operating environment.

Comfortable Capital Buffers: The bank's FCC ratio strengthened to a  solid 18.7% at end-2023 (end-2022: 17.1%) on the back of strong  internal capital generation. Fitch expects ACBA to maintain its  capital buffers comfortably above their regulatory minimums,  including additional buffers, resulting in sufficient capital to  sustain future growth.

Stable Funding and Liquidity: ACBA's high 109% loans/deposits ratio  reflects moderate reliance on non-deposit funding (19% of total  liabilities at end-2023). Liquid assets (including cash, due from  banks, and government securities), net of wholesale funding  repayments scheduled for the next 12 months, covered a moderate 34%  of customer deposits at end- 2023, while we believe that maturing  wholesale funding could be at least partly rolled over.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative  Rating Action/Downgrade

A downgrade of ACBA's ratings would be triggered by a sovereign  downgrade.

A downgrade could also result from a material deterioration in the  operating environment, leading to a sharp increase in problem assets,  which would significantly weigh on profitability and capital. In  particular, the ratings could be downgraded if higher loan impairment  charges consume most of the profits for several consecutive quarterly  reporting periods.

A reduction of the FCC ratio to below 15% on a sustained basis, due  to a combination of weaker earnings, faster loan growth and higher  dividend pay-outs, could also be credit-negative. Material funding  disruptions could also result in a downgrade if they translate into  serious refinancing issues for the bank, which it is unable to  mitigate via available local- and foreign-currency liquidity.

Factors that Could, Individually or Collectively, Lead to Positive  Rating Action/Upgrade

An upgrade of ACBA`s ratings would require a sovereign upgrade,  coupled with a significant improvement of Fitch's assessment of the  local operating environment. In addition, an upgrade would require a  stronger, more diversified franchise, and a longer record of robust  performance.

ACBA's Government Support Rating (GSR) of 'no support' reflects  Fitch's view that the Armenian authorities (BB-/Stable) have limited  financial flexibility to provide extraordinary support to the bank,  given the banking sector's large foreign- currency liabilities  relative to the country's international reserves.

Upside for the GSR is currently limited and would require a  substantial improvement of sovereign financial flexibility as well as  an extended record of timely and sufficient capital support being  provided to local banks.

VR ADJUSTMENTS

The asset quality score of 'b+' is below the category implied score  of 'bb' due to the following adjustment reason:  underwriting  standards and growth (negative)

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF  RATING

The principal sources of information used in the analysis are  described in the Applicable Criteria.

ESG CONSIDERATIONS

ACBA has a score of '3' for Exposure to Environmental Impacts against  the standard score of '2'. The score reflects the bank's significant  exposure to the agricultural sector (around 20% of loans) and the  associated climate risks.  Unless otherwise state in this section the  highest level of ESG credit relevance is a score of '3'. This means  ESG issues are credit-neutral or have only a minimal credit impact on  the entity, either due to their nature or the way in which they are  being managed by the entity. Fitch's ESG Relevance Scores are not  inputs in the rating process; they are an observation of the  materiality and relevance of ESG factors in the rating decision. For  more information on Fitch's ESG Relevance Scores,  visitwww.fitchratings.com/esg.

According to the Financial Rating of Armenian Banks as of December  31, 2023, prepared by ArmInfo IC, Acba Bank is included in the TOP-5  in terms of main balance sheet indicators: assets - 4th place ($1.9  billion), credit investments - 3rd place ($1.3 billion), total  capital - 4 plaace($329.3 million), total liabilities - 4th place  ($1.6 billion), liabilities to customers - 3rd place ($1.2 billion).  The bank took the 3rd place in terms of net profit for 2023, ensuring  it at the level of $70.6 million, with y-o-y growth of 26.6%.  The  volume of agricultural lending by Acba Bank reaches 35% of the total  lending of banks in this sector, and the share of agricultural loans  in Acba Bank's credit portfolio exceeds 18%. In terms of lending  volume to the agricultural sector, Acba Bank traditionally holds the  lead by a large margin from other participants in the banking market.  Acba Bank is also a leader in the volume of SME lending, covering  over 20% of total lending by banks in the SME sector, and the share  of these loans in Acba Bank's loan portfolio reaches 45%.

The shareholders of Acba Bank are:  "Sacam International" SJSC with  participation in the bank capital of 4.55%, ACBA Federation CJSC, the  biggest shareholder, 81.6%, and the remaining 13.85% shares belong to  legal entities and individuals, including employees of ACBA  Federation, ACBA Leasing and Acba Bank. The bank has been operating  since 1996. 

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