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Rating Action:

Moody's assigns first time ratings for Ashur International Bank for Investment

07 Jan 2021

Limassol, January 07, 2021 -- Moody's Investors Service ("Moody's") has today assigned first time local and foreign currency long-term and short-term bank deposit ratings of Caa1/NP for Ashur International Bank for Investment (Ashur). At the same time, the rating agency has assigned a Baseline Credit Assessment (BCA) and Adjusted BCA of caa1, long-term and short-term Counterparty Risk (CR) Assessments of B3(cr)/NP(cr), long-term local and foreign currency Counterparty Risk Ratings (CRR) of B3/Caa1 respectively, and short-term local and foreign currency CRRs of NP. The outlook assigned to the long-term deposit ratings is stable. A list of the assigned ratings are available at the end of this press release.

RATINGS RATIONALE

Ashur is a private shareholding company registered and incorporated in Iraq in 2005. Its registered office is in Baghdad with paid in capital of IQD 250 billion. The Bank, which is amongst the more established privately owned banks in Iraq, provides banking services for retail and corporate clients through its main branch in the Karrada area of Baghdad and nine branches across Iraq.

Ashur's Caa1 long-term deposit ratings take into consideration the bank's caa1 BCA and do not benefit from any government support uplift given that they are at the same level as the Government of Iraq's (Caa1, stable) issuer rating and also based on Moody's expectation of a low probability of government support, given the small size of the bank within the country's banking system.

RATIONALE FOR BCA

Ashur's caa1 BCA reflects Moody's expectation that the bank will maintain its track record of 1) strong capital adequacy, 2) solid profitability and 3) ample liquidity buffers. These strengths are balanced by 1) weak asset quality mainly from the bank's legacy loan portfolio and further accentuated by the weak operating environment in Iraq, 2) sizeable balances with the central bank, which closely link Ashur's credit profile to the Iraqi government's Caa1 rating, 3) a limited and concentrated funding base, and 4) a large open foreign currency position.

STRONG CAPITAL ADEQUACY

Ashur's capital buffers are healthy and provide the bank with strong capacity to absorb loan losses. The bank had a tangible common equity ratio (TCE) close to 100% as at December 2019. This compares to the bank's reported CAR ratio of 271% under the Central Bank of Iraq's (CBI) regulatory framework.

Moody's adjusts the bank's risk-weighted assets (RWA), applying a higher weight on money placed with central bank and also on its financing portfolio to bring it in line with the Basel III framework. Despite Moody's adjustments, capital remains a fundamental strength for Ashur and its net equity remains sizeable, constituting around 63% of total assets as at December 2019. The Agency expects the bank's capitalisation to remain strong, reflecting relatively moderate loan growth amid the difficult operating environment.

SOLID PROFITABILITY MODERATED BY REVENUE CONCENTRATION

The bank's profitability is solid and, measured by net income to tangible assets, improved to 1.42% as at December 2019 compared to 1.01% in 2018. Similarly, the bank's cost-to-income ratio improved to 58% in 2019 from 62% in 2018.

Ashur's operating income remains largely driven by its fee and foreign exchange income which made up around 75% of its operating revenue for 2019 (even higher at 91% in 2018). While this type of income is generally less capital intensive, Moody's notes that this may have greater volatility, especially the income derived from the foreign transfer operations which are heavily dependent on the Central Bank's auction window, with supply dependent on foreign currency availability. Additionally the bank's commission income from the off-balance sheet business (letter of guarantees) has been on a declining trend as it has lost market share following a decision to tighten underwriting for this risky product.

The lack of opportunities to deploy capital in the domestic market remains a challenge for Ashur's profitability. Most of the bank's local currency liquidity is being placed at the Central bank without any returns against the auction window, while returns on short term foreign currency placements are under pressure amid the low rate environment. Additionally, credit growth is expected to remain relatively moderate given the current difficult operating environment and hence Moody's expects net financing income to remain subdued for the foreseeable future.

DEPOSIT FUNDED PROFILE AND HEALTHY LIQUIDITY BUFFERS

Ashur's balance sheet remains deposit funded with a low gross loans to deposit ratio of 21% as at December 2019, giving the bank ample room to grow its loan book. However the bank's funding remains largely concentrated towards few large and related party depositors which subjects the bank's funding to event risk. Furthermore, a large portion of the deposits is connected to highly volatile foreign exchange auctions, which leave the bank as soon as the exchange auction results are out. The lack of investment opportunities in the local market limits the bank's incentive to seek higher volumes of deposits.

Ashur enjoys high level of liquidity largely coming from its equity funding. As at December 2019, the bank's liquid assets stood at 90% of its total tangible banking assets. Moody's expects Ashur to maintain healthy liquidity buffers for the next 12-18 months supported by relatively moderate credit growth. The rating agency also notes that a large portion of the liquid assets are in foreign currency short-term placements outside Iraq which could be subject to exchange risks if there was a need to transfer to local currency.

CHALLENGING OPERATING ENVIRONMENT REFLECTED IN MOODY'S VERY WEAK (-) MACRO PROFILE FOR IRAQ

Iraq's ample natural resources - a key feature for its economic strength - is largely moderated by volatile economic growth, inadequate infrastructure and the economy's lack of diversification and competitiveness. Several years of armed conflict and poor security have prevented the economy from reaching its potential. The agency considers the country's institution and governance strength to be very poor, suffering from endemic corruption and lack of transparency which has weakened the efficiency of public services. The political situation is complex, and domestic and geopolitical risks are relatively closely intertwined, reflecting ethnic and sectarian tensions and Iraq's location in an unstable region. Moody's assessment of Iraq's macro profile also takes into consideration the large number of privately owned banks in the country resulting in a highly fragmented system. The agency also notes the risks associated with the legal framework in the county which is still operating under legacy laws that require updating to protect banks, especially in terms of execution and enforcement.

ASSET QUALITY PROFILE LINKED TO GOVERNMENT

Despite the high level of non-performing loans, Ashur's asset quality profile is largely linked to that of the government because a large portion of its assets, roughly one third, is in the form of balances with the CBI.

The bank's net financing portfolio remains very small, at 4% of total assets. Legacy non-performing loans associated with several years of war in Iraq forced the bank to take a cautious approach to credit risk, which prevented it from growing its loan book. The bank's loan portfolio became almost fully non-performing (NPLs at 99% as at December 2017) due to it being largely concentrated in war affected regions in Iraq and also due to the weak underwriting standards at the time. More recently, the bank significantly improved its underwriting standards and started selectively growing its loan book with NPLs in the new portfolio at or less than 5% (53% for the full portfolio which includes legacy on-balance sheet loans as at December 2019).

Ashur's sizeable foreign currency open position, common for Iraqi privately owned banks, is also a key consideration in its asset quality. Lack of investment opportunities in the domestic market in addition to foreign currency exchange controls, has forced a large number of Iraqi banks, including Ashur, to maintain high level of balances outside Iraq. This net open position and investments outside Iraq exceeds the regulatory limits set by CBI and could subject the banks to regulatory fines and also exchange risks.

CORPORATE GOVERNANCE

Corporate governance weaknesses can lead to a deterioration in a bank's credit quality, while governance strengths can benefit its credit profile. Governance risks are largely internal rather than externally driven. Governance is highly relevant for the bank, as it is to all banks operating in Iraq. For Ashur, corporate governance remains a key credit consideration and requires constant monitoring.

RATIONALE FOR LONG TERM DEPOSIT RATINGS

Ashur's Caa1 long-term ratings take into consideration the bank's caa1 BCA and do not benefit from any support uplift given it is at the same level as the Government of Iraq's (Caa1, stable) issuer rating and also based on Moody's expectation of a low probability of government support, given the small size of the bank within the system.

RATING OUTLOOK

The outlook on the long term deposit ratings is stable. The stable outlook reflects the sound loss absorption capacity, solid profitability and healthy liquidity reserves which balance the bank's concentrated funding base, asset risk pressures amid difficult operating conditions and sizeable foreign currency net open position. The outlook also reflects the stable outlook on the Sovereign's Caa1 issuer rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Given Ashur's deposit ratings are at the sovereign level, any upgrade on the rating is unlikely in the near future.

Downward pressure on Ashur's ratings could develop following (1) significant deterioration in profitability, (2) deterioration in the bank's operating environment, resulting in weakening solvency and liquidity, (3) a downgrade of the Iraq sovereign rating or (4) bank being subject to significant regulatory fines or operating losses due to the sizeable foreign currency net open position.

LIST OF AFFECTED RATINGS

..Issuer: Ashur International Bank for Investment

Assignments:

....Adjusted Baseline Credit Assessment, Assigned caa1

....Baseline Credit Assessment, Assigned caa1

....Long-term Counterparty Risk Assessment, Assigned B3(cr)

....Short-term Counterparty Risk Assessment, Assigned NP(cr)

....Short-term Counterparty Risk Ratings, Assigned NP

....Long-term Counterparty Risk Rating (Local Currency), Assigned B3

....Long-term Counterparty Risk Rating (Foreign Currency), Assigned Caa1

....Short-term Bank Deposit Ratings, Assigned NP

....Long-term Bank Deposit Ratings, Assigned Caa1, Outlook Assigned Stable

Outlook Action:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for this rating is Ashraf Madani, +971 (423) 795-42.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Constantinos Kypreos
Senior Vice President
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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