OREANDA-NEWS. Fitch Ratings has revised Eastern and Southern African Trade and Development Bank's (PTA Bank) Outlook to Negative from Stable and affirmed the Long-term Issuer Default Rating (IDR) at 'BB'. The Short-term IDR has been affirmed at 'B'. A full list of rating actions can be found at the end of this rating action commentary.

The revision of the Outlook reflects pressure on asset quality stemming from a rapid rise in loan arrears since late 2014 as well as the rapid growth of the bank's operations.

KEY RATING DRIVERS
The ratings and Negative Outlook reflect the following key rating drivers:

Credit risk has deteriorated rapidly since late 2014, although the bank exhibits a fairly low headline level of impaired loans (2.7% at end-June 2015). The bank has managed to reduce its risk exposure through recourse to credit insurance and sale of credit exposure to other financial institutions.

The large trade finance facility granted to the Zambian government to fund oil imports (USD728m as of end-August 2015) has accumulated arrears since late 2014. Although it is partly covered by credit insurance, the net exposure for PTA Bank remains significant relative to shareholders' equity (around 20%). The facility was rescheduled in July 2015; it is now performing in line with rescheduled terms and repayments received have reduced the uninsured share of the loan. In addition, loan arrears increased substantially since 2014, as the drop in commodity prices affected the economy of East African region, and the bank has had to restructure several other facilities. Rescheduled loans - other than the Zambia facility - represented 4% of total portfolio.

The rapid deterioration in asset quality partly reflects the focus of operations on trade financing facilities with regional countries, which are of fairly low credit quality. Concentration metrics are among the highest among sub-regional multilateral development banks (MDBs), with the five largest exposures accounting for 61% of total loans at end-June 2015 and the largest single exposure, Sudan, accounting for 108% of shareholders' equity.

PTA Bank's capital base has been strengthened by the USD100m capital increase launched in 2013, and so far, payments of USD80m have been received and some USD50m committed. Nevertheless, due to the rapid growth in lending in the last three years, the equity to asset ratio decreased in 2014. Given the comfortable profits generated by the bank (ROE was 14.5% in 1H15) and capital committed by shareholders, Fitch expects a stabilisation of capitalisation metrics in 2015.

Loans have grown rapidly since 2011 (34% per year on average), driven by a rise in trade financing loans. They mainly take the form of USD-denominated facilities granted to Eastern and Southern African states such as Sudan and Zambia (B / Stable).

Loans are funded by borrowings from international banks and development institutions, as well as by debt raised on the capital markets. Leverage is on a rising trend, with total debt accounting for 459% of equity at end-June-2015 (vs. 420% at end-2013), which is high compared with other sub-regional MDBs. Although treasury assets only cover 21% of short-term debt, liquidity is sound overall, due to the short maturity of loans and, to a lesser extent, substantial unused, albeit mostly uncommitted, bank facilities.
Shareholders' capacity to support is low, with an average rating of key shareholders of 'B' at end-June 2015. Besides, in Fitch's view, the propensity of key shareholders' to provide support in case of need is fairly weak.

RATING SENSITIVITIES
The Negative Outlook reflects Fitch's view that risks are currently weighted to the downside. Developments, either individually or collectively, that could lead to a downgrade of the rating, are as follows:

- The ratings would be particularly sensitive to an accumulation of arrears on large sovereign exposures and to an increase in loan restructurings. The agency will pay attention to the performance of the loans rescheduled in 2014/15, and in particular to the bank's exposure to Zambia. Inability of the Zambian government to repay the facility according to the new schedule would be detrimental to the ratings.
- A continued rapid rise in lending would, in Fitch's opinion, lead to deterioration in the bank's capitalisation and put negative pressure on PTA Bank's ratings.

Conversely, the following developments could result in the Outlook being revised to Stable:

- Full and timely repayment of the rescheduled Zambian facility and an improvement in the overall asset quality of the loan book resulting in a reduction in impaired loans.
- New capital injections leading to a material strengthening in capitalisation.

KEY ASSUMPTIONS
Fitch assumes no material change in the economic growth outlook for the East and Southern African region and no significant change in commodity prices in the short-term.

The full list of rating actions is as follow:
- Long-term IDR: affirmed at 'BB', Outlook revised to Negative from Stable
- Short-term IDR: affirmed at 'B'
- Long-term National Rating: affirmed at 'AAA(ken)', Outlook Stable
- USD1bn senior unsecured medium term note programme: affirmed at 'BB'/'B'
- Senior unsecured notes: affirmed at 'BB'

In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.