MOODY'S ASSIGNS D TO FINANCIAL STRENGTH RATING AND Ba2 (LONG TERM) AND NP (SHORT TERM) TO BANK DEPOSIT RATINGS OF EESTI FOREKSPANK (ESTONIAN FOREXBANK)
Limassol, 05-15-98 -- Moody's Investors Service assigned a Bank Financial Strength Rating (BFSR) of D to Eesti Forekspank (Estonian Forexbank). Long and short-term ratings Ba2 and Not-Prime were also assigned for foreign currency deposits. This is the first time Moody's assigned ratings to Forekspank.
Moody's said that Forekspank's ratings reflect its franchise with offshore commercial enterprises which brings the bank substantial non-resident deposits and high fee and commission income. In addition, the bank has been profitable comparing well with its peers and has successfully promoted its electronic distribution channels. In spite of these positive aspects, Forekspank is very small, even by Estonian standards, and future growth cannot be guaranteed in an increasingly competitive environment. Also, its funding is volatile since it relies heavily on non-resident foreign currency demand deposits.
Going forward, Forekspank seeks to achieve a strategic partnership with a prestigious (preferably international) bank to improve its long-term prospects by enhancing access to cost efficient and stable funding. If not successful, its medium- to long-term prospects are not favourable and this will probably adversely affect its performance and financial strength. In any case, the bank plans to raise more capital in the spring/summer of 1998 which will be partly used to expand into Russia.
Moody's stated that the bank was incorporated as a private enterprise and commenced operations in January 1993, escaping Estonia's banking crisis of 1992. In January 1996, it merged with Raepank which was of similar size and had matching strategy and business profile resulting in a smooth merging process. The bank is specialised in handling international trade cash flows and providing banking services to medium sized Estonian and non-resident companies. Forekspank has acquired expertise in soft-currency trading with CIS countries, especially Russia. The bank intends to capitalise on its expertise with Russian enterprises, a feature that distinguishes it from other Estonian banks. To maintain and even sharpen its edge with Russian business, the bank has established a presence in Moscow through an alliance with "Pioneer" a medium-sized Moscow-based bank. Forekspank will introduce Pioneer to its products, systems and procedures so that it will extend similar services in Russia.
Forekspank is the fifth largest bank in Estonia and possesses a 6.5% market share in the banking sector's assets. Currently the largest four banks are involved in merger discussions that are likely to result in the formation of two larger entities; Hansabank is expected to finalise its merger with Hoiupank and Uhispank with Tallinna Bank. If the upcoming general meetings of the four banks ratify the mergers Forekspank will automatically move to the third position of the country rankings. However, Moody's believes that being a small bank in a tiny and increasingly competitive banking sector is perhaps the greatest challenge facing Forekspank. Larger banks are expected to pay more attention to lucrative sectors that received lower priority in the past. Therefore, Forekspank's core markets may attract their attention, perhaps for the first time.
Also, Moody's said that the bank's funding is volatile. Month-to-month movements of deposit balances indicate volatility greater than the banking sector average. However, over the last four years the longer term trend of the most volatile portion of its funding (non-resident foreign currency demand deposits) has been positive and fairly steady. The bank has recognised the potential problems that might arise from the dependence on such deposits and therefore it will intensify its efforts to increase the proportion of Estonian deposits. Combined with the fact that all large Estonian banks are chasing retail deposits, it appears unlikely that the bank will be successful in raising significant domestic deposits to replace its non-resident funding base, Moody's said.
Moody's believes that Forekspank's loan quality is good but medium term trends for the banking sector are unfavourable. Since October 1997, interest rates have been significantly higher placing a strain on borrowers and will possibly result in a rising rate of defaults. Also, the substantial falls on the stock market between October 1997 and January 1998 may cause additional problems for borrowers.
Forekspank is headquartered in Tallinn, and at the end of December 1997 had consolidated assets of Estonian Kroons 2,581 million (US$ 180 million).
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