ArmInfo. S&P Global Ratings upgraded its long-term issuer credit rating on Ardshinbank CJSC to 'BB-' from 'B+' and revised the outlook on the rating to "stable". At the same time, we affirmed our 'B' short-term issuer credit rating on the bank. This is noted in a message from S&P Global Ratings.
According to the source, "the government of Armenia's decision to replace Nagorno-Karabakh's debt benefits Ardshinbank's risk profile.In December 2023, the Armenian government officially replaced 70% of the debt of the now dissolved Republic of Nagorno-Karabakh (Artsakh) with sovereign bonds. This reduced payment uncertainty significantly and structurally improved the risk profile of Ardshinbank, whose exposure to debt issued by Nagorno-Karabakh amounted to about 25% of equity. The remaining 30% were written down by the bank. The resulting loss was mostly offset by the strong operating performance in 2023.
We expect the acquisition of HSBC Armenia will have a limited effect on Ardshinbank's capitalization.We believe the transaction could reduce Ardshinbank's risk-adjusted capital (RAC) ratio by about 150 basis points, compared with an estimated RAC ratio of 8.4% as of Dec. 31, 2023. We expect the RAC ratio will exceed 7.5% over the medium term. Our forecast factors in slower organic loan growth over 2024-2025 because we believe the bank has already used much of its excess liquidity in 2023. We also understand that Ardshinbank is unlikely to distribute profits for 2023 but factor in a 30% payout from 2024 onward.
Risks associated with the planned acquisition of HSBC Armenia will likely be manageable.With a balance sheet of AMD316 billion (about $780 million), including parent operations, as of Dec. 31, 2023, HSBC Armenia accounts for about 20% of Ardshinbank's size. The acquisition will increase Ardshinbank's share in total system lending to about 17.5%. We do not rule out some pressure on the liability side of the balance sheet as we consider that the deposit base of foreign-owned institutions in the region is more volatile after the change in ownership. We believe, however, that HSBC Armenia's and Ardshinbank's liquidity buffers are large enough to deal with a potential increase in withdrawals.
Ardshinbank's asset quality metrics will stabilize at levels that are in line with those of its domestic peers after the merger.We expect the share of problematic assets--including stage 3 loans, purchased or originated credit-impaired loans, and repossessed collateral--at Ardshinbank will improve to about 4.5% by year-end 2024, from 5.8% at year-end 2023. We believe the acquisition of HSBC Armenia will increase the granularity of Ardshinbank's portfolio. The stable outlook reflects our expectation that Ardshinbank will maintain its adequate risk profile and capitalization over the next 12-18 months, while keeping risks related to the acquisition of HSBC Armenia in check.
We could lower the ratings if Ardshinbank's: Capitalization declines materially because of unexpected credit losses or faster-than-expected credit growth; Asset quality indicators deteriorate significantly; orAcquisition of HSBC Armenia leads to unexpected challenges.
A positive rating action is remote at this stage as it would require an improvement in the sovereign rating on Armenia and in the bank's creditworthiness," they concluded.
According to the Express Ranking of Armenian Banks as of December 31, 2023, prepared by ArmInfo IC, Ardshinbank is the leader in terms of assets - $4.04 billion and liabilities - $3.6 billion, also occupying the lead in obligations to clients - $2.4 billion and investments in securities - $819.3 million. By the volume of credit investments and other loans, the bank occupies the 2nd place: $1.7 billion. The bank also ranks 2nd in terms of total capital, - $472.7 million. Ardshinbank has secured its leadership in terms of net profit - $154.8 million for 2023.
Ardshinbank is the only Armenian company with assigned ratings from the big three credit rating agencies (Standard & Poor's, Moody's and Fitch).
