OREANDA-NEWS. Fitch Ratings has downgraded Crown Agents Bank Limited's (CABK) Long-term Issuer Default Rating (IDR) to 'BBB' from 'BBB+' and Viability Rating to 'bbb' from 'bbb+'. Fitch has also placed CABK's Short-term IDR of 'F2', Long-term IDR and VR on Rating Watch Negative (RWN). The bank's Support Rating and Support Rating Floor have been affirmed at '5' and 'No Floor'.

The downgrade of the Long-term IDR and VR reflects the weaknesses in the bank's current business model, which include high concentrations in both assets and liabilities and high sensitivity to interest rates. The currently prolonged low interest rate environment, combined with tightened regulatory oversight, has materially reduced CABK's profitability and capital generation.

The IDRs and VR have been placed on RWN to reflect Fitch's expectation that the bank's risk profile will likely increase following the acquisition (announced in late July 2015 but likely to be finalised at year-end) of CABK to funds advised by Helios Investment Partners LLP (Helios) by its current 100% shareholder, Crown Agents Limited. The transaction is subject to regulatory approvals.

Fitch expects to resolve the RWN once the acquisition is finalised and once the new owner's strategic plans are disclosed fully, which may take longer than six months.

KEY RATING DRIVERS
IDRS and VR
CABK's Long-term IDR is based on its VR, which is underpinned by its strong liquidity and the low credit risk profile of its assets. The bank's primary role is to disburse aid to developing countries while acting as a depositor bank for various local and central banks based in the recipient countries. Consequently, its balance sheet is liability-led and assets consist mainly of short-term unsecured money-market placements with, or short-term instruments of, highly rated financial institutions.

Liquidity is ample. The bank is almost entirely funded by institutional deposits arising from pre-disbursed aid and long-standing relationships with aid recipients and states. Funds are placed largely as cash deposits with the Bank of England or invested in highly liquid, short-term securities issued by highly rated banks. Liquidity weakened slightly in 1H15 as the bank sought to improve its spreads by lengthening slightly the maturity profile of its assets (to the three- to 12-month bucket). Fitch would view any significant widening of the mismatch as a risk, given the high concentration of CABK's deposits.

Single name concentrations on the bank's assets are also high but have been reducing, with a maximum limit on placements held with third parties of 100% of its capital base being met since 1 January 2014. However, concentration is likely to remain a feature, because of the small absolute size of the bank's capital. Concentration risk is mitigated by the low credit risk of CABK's counterparties (mostly with a minimum Short-term rating of 'F1').

The bank offers a small amount of on-balance-sheet lending, but overall exposure is small and typically to government and public-sector bodies and generally backed by collateral. Some off-balance-sheet exposure is generated by CABK's trade finance business, but so far, this has remained moderate and generally backed by collateral (largely cash). The bank is also exposed to settlement risk arising from its FX transactions, although potential losses are small due to adequate controls and fairly conservative limits.

Total equity is small, which when considered with the concentration of the bank's assets and weak internal capital generation, would ordinarily place its ratings firmly below investment-grade. Nonetheless, the ratings are supported by CABK's low-risk profile and strong liquidity.

Management has increased efforts to improve revenue diversification in the medium term and the acquisition by the funds advised by Helios (a private equity and venture capital firm) will likely result in some growth in the bank's business in Africa, particularly transaction banking. This will be achieved thanks to capital and cash injections, which will be utilised initially to boost its business development, risk management, and IT. With a number of the major banks withdrawing from Africa, Helios believes CABK's current franchise has placed it well to serve the current market share it has and to also attract new customers.

We expect the bank's appetite for risk to moderately increase over time, as a result of the change in ownership, and this will likely result in a downgrade of the bank's ratings, particularly if diversification into riskier markets leads to a weakening of CABK's credit risk profile. Furthermore, while Helios has stated that there are no plans for CABK to issue debt, Fitch will also monitor whether the bank's funding and liquidity profile will change. On the other hand, Helios does not intend to upstream dividends from CABK in the medium term, which may improve the bank's financial flexibility.

The initial capital injection expected from Helios on acquisition will initially strengthen the bank's capital base but this is not expected to be material. Nonetheless, capital ratios are likely to remain adequate despite weak internal capital generation.

SUPPORT RATING AND SUPPORT RATING FLOOR
CABK's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support from the UK government, although possible, cannot be relied upon. CABK's SR and SRF are unlikely to change as it is not considered a systemically important bank in the UK.

RATING SENSITIVITIES
IDRS and VR
The bank's ratings are highly sensitive to any increase in risk appetite, and an increase in credit risk (on or off balance sheet) would likely result in a downgrade of the bank's ratings, possibly by several notches to reflect the high concentrations, weak business model, and low earnings and profitability.

We would also downgrade the bank if we noted a weakening of its liquidity profile. This could occur through widening of the mismatch between assets and liabilities, a significant reduction in high quality liquid assets, or if its liabilities showed an increased concentration. Furthermore, the ratings would also come under pressure if the bank's funding profile were to deteriorate as a result of an increase in non-equity funding. Further downward pressure to the ratings could come in the form of material reputational damage to CABK's franchise, which could arise if the bank is found to be weak on regulatory compliance or conduct.

Potential upside to the ratings remains limited

SUPPORT RATING AND SUPPORT RATING FLOOR
We currently do not expect to change CABK's SR and SRF as we do not consider it a systemically important bank in the UK.