(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed Eastern and Southern African Trade andDevelopment'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 Outlookhas been revised to Positive.
The Outlook revision to Positive reflects a sharp decline in non-performingloans (NPLs) as a result of the restructuring of a trade-finance deal withZimbabwe, which has been in default since 2009. The USD39.4m impaired tradefinance loan, which represented the bank's second largest exposure, wasrestructured in late 2011. As a result, credit quality has improvedsignificantly with NPLs falling to 4.7% at end-2011 from 10.9% at end-2010. NPLsexcluding Zimbabwe have also improved due to the low default rate ontrade-finance loans, which make up 63% of the loan portfolio. Provisioning coverhas also improved substantially, with the reclassification of the Zimbabweanloan as well as the overall improvement in NPLs, rising to 69.6% of impairedloans (end-2011) from 40.5% (end-2010).
Growth in trade finance activity has resulted in a marked improvement inprofitability, further supporting the Outlook revision. Return on assets and onequity have increased to 14.0% and 2.8% respectively in 2011, up from 8.7% and2.4% at end-2008. In 2011 net income grew by 68% y-o-y, mostly backed by dynamicfee 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 asthe loss of earnings related to the down-selling of Zambian exposure. As thebank does not distribute dividends, profits are used to strengthen its equitybase. Interest rate and currency risk is limited due to the matching of assetsand liabilities.
Concentration risk is high in comparison with regional peers due to thetrade-finance facility with Zambia to import oil. Gross exposure to the Zambiangovernment currently stands at US281m. However, due to partial down-selling aswell as credit insurance, net exposure on this operation is reduced by twothirds. As a result, although concentration remains a rating weakness, it hasimproved 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 represent95.8% of equity, compared to 121.2% at end-2010.
The rapid growth in activity has eroded capitalisation in recent years, with ausable/required capital ratio of 0.9x at end-2011 (2010: 1.1x). However, theratio of equity to assets of 20.3% at end-2012 remains comfortable. Leverageremains a rating weakness as it is higher than other sub-regional MDBs; it hasdeteriorated over the past three years as the bank has taken on additional debtto fund its expansion. In view of the large stock of undisbursed loans, Fitchexpects these metrics to deteriorate slightly in 2012. PTA Bank's capacity toexpand its loan book in the future, without eroding capital and leverage ratiosfurther, 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 twonon-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 isstrong, the ability of weaker-rated shareholders to do so is limited. This isillustrated by an average rating of callable capital of 'B+' at June 2012 andrecurrent arrears on due capital instalments.
PTA Bank is a sub-regional MDB operating in the Common Market for Eastern andSouthern Africa (COMESA). It provides mainly trade finance and project financefor private-sector institutions. Its head office is in Bujumbura (Burundi) butmanagement has relocated to Nairobi, Kenya. The bank was created in 1985 and wasoriginally named the Eastern and Southern African Trade and Development Bank,but it is better known as PTA Bank (PTA stands for Preferential Trade Area, theformer name for COMESA).
Future positive rating action depends on the stabilisation of capital ratios,through a more modest growth strategy combined with additional capitalincreases. A rapid increase in lending operations that was not supported by astrengthening of the capital base would have negative rating implications.
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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)