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TEXT-Fitch affirms PTA Bank at 'BB-', revises outlook to positive

(The following statement was released by the rating agency)

Oct 11 - Fitch Ratings has affirmed Eastern and Southern African Trade and Development's (PTA Bank) Long-term Issuer Default Rating (IDR) at 'BB-', Short-term IDR at 'B' and National Long-term Rating at 'AA+(ken)'. The Outlook has been revised to Positive.

The Outlook revision to Positive reflects a sharp decline in non-performing loans (NPLs) as a result of the restructuring of a trade-finance deal with Zimbabwe, which has been in default since 2009. The USD39.4m impaired trade finance loan, which represented the bank's second largest exposure, was restructured in late 2011. As a result, credit quality has improved significantly with NPLs falling to 4.7% at end-2011 from 10.9% at end-2010. NPLs excluding Zimbabwe have also improved due to the low default rate on trade-finance loans, which make up 63% of the loan portfolio. Provisioning cover has also improved substantially, with the reclassification of the Zimbabwean loan as well as the overall improvement in NPLs, rising to 69.6% of impaired loans (end-2011) from 40.5% (end-2010).

Growth in trade finance activity has resulted in a marked improvement in profitability, further supporting the Outlook revision. Return on assets and on equity have increased to 14.0% and 2.8% respectively in 2011, up from 8.7% and 2.4% at end-2008. In 2011 net income grew by 68% y-o-y, mostly backed by dynamic fee income on trade finance deals and strong growth in interest income (up 66% y-o-y). These trends more than offset higher interest and staff costs as well as the loss of earnings related to the down-selling of Zambian exposure. As the bank does not distribute dividends, profits are used to strengthen its equity base. Interest rate and currency risk is limited due to the matching of assets and liabilities.

Concentration risk is high in comparison with regional peers due to the trade-finance facility with Zambia to import oil. Gross exposure to the Zambian government currently stands at US281m. However, due to partial down-selling as well as credit insurance, net exposure on this operation is reduced by two thirds. As a result, although concentration remains a rating weakness, it has improved significantly. The Zambian deal alone now represents 32.8% of equity, down from 48.8% at end-2009, while the bank's five largest exposures represent 95.8% of equity, compared to 121.2% at end-2010.

The rapid growth in activity has eroded capitalisation in recent years, with a usable/required capital ratio of 0.9x at end-2011 (2010: 1.1x). However, the ratio of equity to assets of 20.3% at end-2012 remains comfortable. Leverage remains a rating weakness as it is higher than other sub-regional MDBs; it has deteriorated over the past three years as the bank has taken on additional debt to fund its expansion. In view of the large stock of undisbursed loans, Fitch expects these metrics to deteriorate slightly in 2012. PTA Bank's capacity to expand its loan book in the future, without eroding capital and leverage ratios further, will depend on its ability to improve its capital base.

PTA Bank enjoys strong shareholder support, particularly from non-regional, highly rated shareholders. PTA Bank is owned by 18 regional countries and two non-regional shareholders, the African Development Bank ('AAA'/Stable) and China ('A+'/Stable). All have committed to provide callable capital in case of need. While Fitch considers that shareholders' willingness to support the bank is strong, the ability of weaker-rated shareholders to do so is limited. This is illustrated by an average rating of callable capital of 'B+' at June 2012 and recurrent arrears on due capital instalments.

PTA Bank is a sub-regional MDB operating in the Common Market for Eastern and Southern Africa (COMESA). It provides mainly trade finance and project finance for private-sector institutions. Its head office is in Bujumbura (Burundi) but management has relocated to Nairobi, Kenya. The bank was created in 1985 and was originally named the Eastern and Southern African Trade and Development Bank, but it is better known as PTA Bank (PTA stands for Preferential Trade Area, the former name for COMESA).

Future positive rating action depends on the stabilisation of capital ratios, through a more modest growth strategy combined with additional capital increases. A rapid increase in lending operations that was not supported by a strengthening of the capital base would have negative rating implications.

For all of Fitch's Eurozone Crisis commentary go to

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The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria, 'Rating Multilateral Development Banks' dated 23 May 2012, is available at

. Applicable Criteria and Related Research: Rating Multilateral Development Banks (New York Ratings Team)

((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging: pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))