OREANDA-NEWS. Fitch Ratings has published Ardshinbank CJSC's Long-term Issuer Default Rating (IDR) of 'B+' with Negative Outlook. A full list of rating actions is at the end of this rating action commentary.

KEY RATING DRIVERS
Ardshinbank's IDRs are driven by its standalone creditworthiness, as expressed by its 'b+' Viability Rating (VR). The VR considers the high dollarisation of the bank's balance sheet, large loan concentrations and the higher-risk nature of some of the major exposures, rapid recent growth in a fairly high-risk environment and moderate loss absorption capacity relative to regulatory capital requirements. The ratings also reflect the bank's notable domestic franchise (market share of 11.5% in domestic lending), so far reasonable financial metrics, solid IFRS/Basel capital ratios and an adequate liquidity cushion in light of upcoming wholesale debt maturities.

The bank's Support Rating Floor of 'No Floor' and '5' Support Rating reflect Fitch's view that the Armenian authorities have limited financial flexibility to provide extraordinary support to banks, if necessary, given the banking sector's large foreign currency liabilities relative to the country's international reserves. Potential support from the private shareholders is also not factored into the ratings, as it cannot be reliably assessed.

The Negative Outlook on the bank's Long-term IDR is driven by the weaker operating environment in Armenia, characterised by a stagnating economy (we expect Armenia to fall into a mild recession in 2015), devaluation pressures and higher interest rates. In Fitch's view, this is likely to negatively impact the bank's profitability metrics, capitalisation and asset quality.

The bank's profitability metrics were reasonable in 2014, although the weakening trend reflected both margin compression, due to competition and higher funding costs, and increased loan impairment charges (LICs), in part to cover loan write-offs. Fitch expects profitability metrics to remain under pressure in 2015, mainly due to higher LICs as loans season in a challenging environment.

At end-1Q15, the share of non-performing loans (NPLs, over 90 days overdue) was a low 2.9% of gross loans, after write-offs (2.9% of average gross loans in 2014) and following lending growth. In addition, restructured exposures accounted for 3.4% of loans, with generally low coverage by loan impairment reserves (LIR). The LIR/NPLs ratio was also moderate at around 65%, reflecting the bank's high reliance on loan collateral.

The loan concentrations are large (the top 25 groups of borrowers comprised 46% of the gross loan book, or 2.4x of Fitch Core Capital, FCC), while some of the major lending exposures, which are not currently in arrears are relatively high risk, in Fitch's view, due to completion and/or business risks. The high share of FX lending (around 60% of the total) poses additional risks, as most of this is issued to unhedged borrowers, whose debt servicing capacity could have been affected by the recent devaluation of the AMD and recessionary environment.

In this context, Fitch views the loss absorption capacity (relative to minimum regulatory capital requirements) offered by the bank's equity cushion (estimated at around 3.8% of end-1Q15 loans) as only moderate. However, annual pre-impairment profit (equal to 4.4% of average gross loans in 2014) offers additional moderate loss absorption. The FCC ratio was a reasonable 17.4% at end-2014 (higher than the regulatory ratio primarily because repossessed collaterals of AMD6bn are deducted from regulatory capital).

At end-1Q15, the share of wholesale funding stood at a significant 38%. The available large liquidity cushion (at around 25% of total assets, largely cash items in foreign currency) was sufficient to cover sizeable refinancing requirements for 2015 (equal to 18% of liabilities), while the bank is looking to diversify its funding structure by source and maturity.

RATING SENSITIVITIES
The bank's performance is sensitive to the performance of the economy and stability of the local currency. The ratings could be downgraded if the weaker operating environment translates into a marked deterioration in the bank's asset quality, performance and capital metrics. A major liquidity shortfall could also cause a downgrade. The stabilisation of the country's economic prospects, and maintenance of the bank's currently sound asset quality and profitability metrics, would reduce downward pressure on the ratings.

The rating actions are as follows:

Ardshinbank
Long-term IDR: published at 'B+', Outlook Negative
Short-term IDR: published at 'B'
Viability Rating: published at 'b+'
Support Rating: published at '5'
Support Rating Floor: published at 'No Floor'