PODGORICA (Montenegro), July 9 (SeeNews) – Moody's Investors Service said on Tuesday it downgraded the foreign-currency deposit ratings of Montenegro’s Atlas Bank to B2/Not-Prime from B1/Not-Prime.
Moody’s also lowered the bank's baseline credit assessment (BCA) to b3 from b2, which is equivalent to the E+ bank financial strength rating (BFSR). The outlooks on all ratings have been changed to negative from stable, the rating agency said in a statement.
It also said that the rating action reflects Atlas Bank's asset-quality deterioration and Moody's expectation of further deterioration in light of challenging operating conditions and subsequent pressure on the bank's earnings-generating capacity and capital buffers, stemming primarily from high provisioning requirements.
Moody's also said in its statement:
-- ASSET QUALITY DETERIORATION OWING TO THE WEAK OPERATING ENVIRONMENT
The main driver for today's action is Atlas Bank's asset quality deterioration and Moody's expectation that the challenging operating environment will continue to weigh negatively on the bank's asset quality metrics. More specifically, the rating agency notes that Atlas Bank's impaired loans-to-gross loans ratio grew to 8.5% as at March 2013, compared to 4.3% as at December 2011; relevant ratios would be much higher when taking into account the renegotiated loans, which are not
classified as impaired. At the same time, the coverage of the impaired loans by loan loss reserves declined to 37.3% as at March 2013, compared to 42.6% in December 2011, which Moody's views as likely inadequate to cover losses, despite the collateral held against such exposures.
The main source of Atlas Bank's asset quality deterioration is the weak economic environment in Montenegro, with real GDP growing by 0.5% in 2012, from 2.5% in 2011. Subdued economic expansion has led to an increase in the unemployment rate, to around 20% in December 2012, and has negatively affected the performance of the bank's consumer portfolio, at 29% of total loans at year-end 2012.
The weak economic conditions have also affected the performance of the corporate sector, with delinquencies in the bank's corporate book also trending up in recent quarters. Although Moody's expects that Montenegro's economic performance will improve owing to a modest recovery in metals production and continued tourism and hydro-electricity growth, the rating agency believes that growth rates will remain well below pre-2008 levels (around 6% GDP growth per year), which will continue to affect the bank through subdued credit growth and asset-quality pressures.
-- SUBSEQUENT PRESSURE ON THE BANK'S PROFITABILITY AND CAPITAL BUFFERS
Moody's also notes that the subdued economic environment continues to impact Atlas Bank's profitability levels and capital buffers. More specifically, the rating agency notes: (1) the weak loan demand in the system which limits the ability to increase revenues; and (2) the need to build provisioning coverage.
During 2012 provisioning expenses absorbed 45% of the bank's pre-provisioning income, with the bank reporting a net income of EUR272,000. If additional loan loss provisions of EUR2.87 million were recognized -- as per the auditors' opinion -- the bank would have reported a net loss of EUR2.6 million in 2012. Moody's expects that elevated provisioning charges and subdued lending opportunities will continue to dampen the bank's profitability going forward.
With regards to capitalisation, although Atlas Bank's capital adequacy ratio of 11.2% (as at December 2012) will increase further following the capital increase which was completed in Q2-2013, Moody's notes that the bank's capital buffers remain inadequate to absorb additional losses, particularly when taking into account low provisioning coverage.
-- DEPOSIT RATINGS CONTINUE TO INCORPORATE ONE NOTCH OF SUPPORT
Atlas Bank's B2 deposit rating continues to incorporate one notch of uplift, based on Moody's view of the likelihood of systemic support, in case of need. The uplift reflects Moody's view of the bank's increasing systemic importance as the fourth-largest deposit-taking institution in Montenegro, with an 8% market share in deposits as of December 2012,
according to Central Bank of Montenegro.
WHAT COULD MOVE THE RATINGS DOWN/UP
Downward pressure might develop on the ratings if Atlas Bank's asset quality, capitalisation and profitability levels were to weaken beyond current expectations. As indicated by the negative outlook on the ratings, upward pressure on the bank's ratings is currently limited.
Headquartered in Podgorica, Montenegro, Atlas Bank reported total assets of EUR204 million according to its audited 2012 financial statements."