Fitch Ratings has downgraded Malta-based Fimbank Plc's Long-term Issuer Default Rating to 'BB-' from 'BB', with a Stable Outlook, and Viability Rating to 'bb-' from 'bb'. At the same time, Fitch has affirmed the bank's Short-term IDR at 'B'.
A full list of rating actions is at the end of this rating action commentary.
The Long-term IDR and VR have been downgraded to reflect FIM's high risk appetite, which has resulted in a significant deterioration in asset quality, as well as unstable and weak earnings.
KEY RATING DRIVERS - IDRS AND VR
FIM's VR and IDRs are driven by its niche focus on trade finance, with relations in a number of emerging markets, including the Middle East and North Africa. They also reflect weak asset quality and profitability relative to peers, as well as capitalisation that is only just acceptable for FIM's risk profile.
This is despite further strengthening of capital in July 2014 following a $48m rights issue supported predominantly by the Kuwait Projects Company Holding K.S.C.P. group, FIM's ultimate main shareholder.
FIM's Fitch core capital/weighted risks ratio was 14.2% at end-September 2014, but is at risk from a high level of unreserved impaired assets and high asset concentration.
Most of FIM's credit deterioration was driven by the consolidation in 1H14 of weak quality factoring assets in India and Russia. Fitch expects asset quality pressures to persist, with remaining factoring assets potentially posing add-on risks.
FIM's revenue generation is low relative to its cost structure, resulting in limited flexibility to absorb further impairment charges as sizeable as those reported in 2014. FIM's liquidity benefits from the short-term nature of its balance sheet. Funding is supported by low-cost deposits from the parent.
The Stable Outlook on the Long-term IDR reflects Fitch's belief that FIM's capital will continue to be supported by its ultimate owner in the foreseeable future, potentially easing further pressures from asset quality and profitability.
Fitch also assumes that in line with KIPCO's dominant ownership, FIM will gradually be more operationally integrated into its parent, which could result in management and strategic changes.
RATING SENSITIVITIES - IDRS AND VR
A positive rating action would primarily come from a substantial recovery of asset quality and earnings, and/or evidence of improved risk controls. Conversely, FIM's VR would be downgraded if asset quality continues to weaken materially, putting earnings and capital under further significant pressure.
If the dominant role of KIPCO in FIM's shareholding means strategic changes that involve, for example, an even higher risk profile and/or weaker capital and leverage, there would also be downward rating pressure.
KEY RATING DRIVERS AND SENSITIVITIES - SUPPORT RATING AND SUPPORT RATING FLOOR
FIM would first look for support from within the KIPCO group. However, the availability of such support cannot currently be relied upon, hence it is not factored into the ratings.
The affirmation of FIM's Support Rating at '5' and Support Rating Floor at 'No Floor' reflect Fitch's assumption that while support from the Maltese authorities is possible, it cannot be relied upon. This is because of the bank's limited systemic importance for Malta.
FIM's SR and SRF are currently sensitive to any changes in Fitch's assumptions around the propensity of Malta to support the bank.
Fitch will assess the ability and propensity of the KIPCO group to provide support to FIM as and when required, which could lead to an upgrade of the bank's SR and withdrawal of its SRF.
The rating actions are as follows:
Long-term IDR: downgraded to 'BB-' from 'BB';
Outlook Stable Short-term IDR: affirmed at 'B'
Viability Rating: downgraded to 'bb-' from 'bb'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'