S&P: Black Sea Trade And Development Bank 'A-/A-2' Ratings Affirmed; Outlook Stable
The affirmation reflects our assessment of BSTDB's moderate business profile and very strong financial profile. Combined, these assessments result in an 'a-' stand-alone credit profile (SACP) under our criteria for MLIs.
BSTDB's mandate is to promote economic development in, and cooperation among, its 11 member countries, which are adjoining or near the Black Sea. This is a challenging mandate in a complex region that has suffered various shocks sincethe onset of the global financial crisis. Headquartered in Thessaloniki, Greece, the bank was established in 1994 and commenced operations in 1999. BSTDB's member countries comprise (in order of the size of capital contribution): Greece, the Russian Federation, and Turkey; Romania; Bulgaria and Ukraine; Azerbaijan; Albania; Armenia; and Georgia and Moldova. Given the highly uncertain macroeconomic outlook across much of the region, we see an opportunity for BSTDB to use its capital to promote investment in member economies over the medium term.
We assess BSTDB's current business profile as moderate. Given that, at present, the MLI's lending is overwhelmingly to the private sector, preferred creditor treatment does not apply to most of its loan portfolio. BSTDB suffered a loss on its holdings of Greek government bonds in 2012, which formed part of its treasury assets.
We do not consider BSTDB's track record of receiving preferential treatment from borrowers to be well established, although there are encouraging signs. In 2014, BSTDB was exempt from the foreign exchange restrictions imposed by Ukraine. The bank was also explicitly carved out from capital controls in the Greek legislative act of July 18, 2015, "Emergency regulation to impose restrictions on money withdrawals and capital transfers and amendments of Laws4063/2012, 4172/2013, 4331/2015 and 4334/2015".
Following a period of relative stasis between 2008 and 2013, when the bank's outstanding portfolio grew by an average of 3% per year in the wake of the global financial crisis, loan approvals and disbursements started to gather pace in 2014 and have maintained momentum through 2015 and the first half of 2016. Between year-end 2013 and year-end 2015, the stock of outstanding loans increased by 43% and approved loans by 53%. We understand that the bank's annual loan target for 2016 has already been achieved, just halfway through the year.
In our opinion, such strong portfolio growth supports the bank's policy importance and overall mandate as regional macroeconomic headwinds prevail. Another consequence has been a marked decline in the bank's capitalization after MLI adjustments are taken into account, which drops from 43% at the end of 2014 to 34% at the end of 2015. Aside from the scale of new loans, many newdisbursements are among the bank's largest single exposures, increasing the related concentration adjustment. Outstanding operations in Turkey increased to 21% of the portfolio at the end of 2015 from 18% the year before, and include a €60 million public-sector loan (over 5% of the outstanding portfolio). We also point to a reduction in equity exposure on the bank's books in explaining the drop in risk-adjusted capital (RAC), after adjustments, as the related benefit derived from an equity related high-risk exposure cap is reduced, relative to overall portfolio growth. At 34%, BSTDB'scapitalization is among the strongest of rated MLIs, however, we expect this ratio to decline further as a result of portfolio growth.
Other notable new loans include the cofinancing of a Turkish geothermal power plant (€65 million or 6% of the end-2015 portfolio value) and a total commitment of €60 million to the development of the Shah Deniz gas field in Azerbaijan, almost half of which has been disbursed. In terms of the overall portfolio, financial institutions (FIs) receive the largest share of loans by sector, at 44% of BSTDB's exposures, followed by materials (12%), industrials (12%), consumer staples (8%), and utilities (6%). Within FIs, Russian and Turkish institutions predominate, with 44% and 16% of loans, respectively. Thebulk (44.5%) of loans to FIs are on-lent to the small and midsize enterprise (SME) sector, mainly in local currency. In this context, BSTDB's portfolio haspockets of elevated risk, especially considering the recent macroeconomic shocks to the region that led to a 20% depreciation of the Russian ruble and 50% devaluation of the Azerbaijani manat over 2015. We lowered the ratings on Turkey to 'BB/B' on July 20, 2016. We also lowered the ratings on Azerbaijan by one notch on Jan. 29, 2016, to 'BB+/B'. (See "Republic of Turkey Foreign Currency Ratings Lowered To 'BB/B'; Outlook Negative" and "Azerbaijan Downgraded To 'BB+' On Weaker Growth And Rising Pressures From Further Declines In Oil Prices; Outlook Stable," published on RatingsDirect.)
Having said that, asset quality has improved, with nonperforming loans (NPLs) dropping from more than 5% of the portfoilio at the end of 2014 to just 1.3% in June 2016, following the write-off of some long-standing problem loans--including an industrial business in Ukraine at a 79.5% discount. Historically, the bank has had few problem loans, with cumulative NPLs totaling €186 million out of €3.5 billion cumulative signed loans. This speaksto an active risk management department, but also a propensity to restructure (10 loans in total), and the relatively small size of the bank's assets at just over €1 billion.
Shareholders demonstrated their support in 2007 through a general increase of the bank's authorized capital to €3.45 billion (special drawing rights [SDR] 3billion) from €1.15 billion. Of the voted €2.3 billion increase, €1.15 billionwas offered to and subscribed by members, thereby increasing the subscribed capital to €2.3 billion. Of this amount, €345 million was to be paid in nine instalments: €115 million in 2010 and the remainder in eight equal annual instalments of just under €28.75 million in 2011-2018. There have been some delays in capital payments, mainly as a result of conflict, although we note alternative arrangements have been negotiated. We understand that the next capital review, which takes place every five years, will be in June 2017. We do not build any capital increase into our assumptions.
With loans typically disbursed soon after approval, the 53% growth in the latter over the past two years had started to pressure our liquidity assessment. However, in May 2015, the bank established a €1 billion MTN program and in May 2016 issued $500 million under it, alleviating these pressures and illustrating improving access to funding markets. Given the anticipated high loan growth, we consider a further draw-down of the MTN program in 2017 to be likely. These offsetting factors result in our funding and liquidity assessment remaining at adequate.
We believe BSTDB can manage all operational risks arising from its location inGreece, which introduced capital controls on domestic banks on June 29, 2015. BSTDB's own funds are kept in banks outside of Greece, so the capital controlshave only a negligible effect on its liquidity management. BSTDB makes and receives most payments through its foreign accounts.
Unlike many other MLIs, BSTDB does not benefit from unilateral credit support annexes on its derivatives contracts, and therefore would have to post collateral against positions with a negative mark-to-market value exceeding set thresholds.
We do not factor into the ratings any uplift for extraordinary shareholder support because we rate all of the sovereign shareholders lower than BSTDB. Further pressure on the ratings on key sovereign shareholders could nevertheless ultimately affect BSTDB's SACP, should it weaken BSTDB's asset quality over time.
We maintain a stable outlook on the basis that BSTDB's still strong capitalization and its newly established MTN program will be sufficient to absorb rapid loan growth while covering liqudity needs at current rating levels. We expect, however, significant pressure to be maintained on MLI-adjusted capital adequacy through 2016.
However, we note that downward pressure on capital adequacy has intensified and we could lower the ratings over the next two years if BSTDB's RAC after MLI-specific adjustments continued to fall at the same pace as during 2014 to 2015, absent capital increases. We could lower the ratings if BSTDB experienced significant additional delays to general capital increases from members or if, contrary to our expectations, we saw a marked deterioration in the bank's loan underwriting standards or performance.
We could raise the ratings if we saw substantial reinforcement of the bank's public policy importance and improvement in its financial profile, including an increase in paid-in capital.
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