Technikabank Azerbaijan ratings downgraded; stable outlook

Moody's Investors Service has downgraded the long-term foreign and local currency deposit ratings of Technikabank (TB) to B3 from B2. The outlook for the long-term deposit ratings and the bank financial strength rating (BFSR) is stable following the downgrade.
The downgrade reflects the bank's overall weakened risk profile as evidenced by deterioration of its asset quality, as well as pressured economic capitalisation and funding base on the back of large borrowing from the Central Bank of Azerbaijan (CBA).
Over the past 12 months TB's asset quality has notably deteriorated amid difficult economic conditions in Azerbaijan, reflected in a substantial increase of restructured and overdue loans to around 25% of gross loans as at H1 2009.
Moody's anticipates potential credit problems within the corporate segment as it accounts for the largest portion of TB's loan book (75%). The rating agency is mainly concerned about those industries that are most exposed to the economic downturn — construction and manufacturing — and Moody's already observes a substantial volume of restructured loans in these segments. The bank's credit exposure to the construction sector, which has been particularly affected by the economic crisis, exceeds 120% of its Tier 1 capital as at 31 August 2009.
Although TB's reported regulatory capital level is currently adequate and sufficient to absorb expected losses over the next 12 to 18 months, its quality has weakened considerably over the past year as it is largely immobilised in fixed assets. This situation is aggravated by significant concentrations of loans in proportion to equity (the top 20 loans accounted for more than 2 times of Tier 1 capital ), thus placing additional pressure on economic capital.
Moody's notes that since YE 2008 TB has significantly increased its reliance on liquidity support and funds from the CBA, which accounted for 26% of non-equity funding as at 31 August 2009, indicating weakening of the bank's stand-alone credit strengths. Those short-term funds were attracted in order to repay foreign borrowings and for new lending.
Moody's expects that this support will eventually be withdrawn, which adds to the uncertainty over the bank's medium-tem liquidity profile. Customer accounts, which historically represented the largest portion of TB's liabilities, have been highly volatile and confidence sensitive in Azerbaijan, raising additional concerns over short-term liquidity.