FIMBank plc - Fitch affirms FIMBank’s BB rating

The international rating agency Fitch affirmed FIMBank’s ratings at BB with a stable outlook. In its report Fitch noted that the ratings reflect FIMBank’s clear strategy, backed by the expertise of a good management, its focus on trade finance business, adequate asset quality and fast improving profitability. At the same time they also take into consideration its small size and weakening capitalisation in a context of increasing exposure to credit and operational risk in emerging economies.

The Fitch report comments that the results for 2005 and for the first six months of 2006 show a clear trend of increasing profitability, with subsidiary London Forfaiting Company (“LFC”) contributing satisfactorily to operating profit. International factoring joint ventures, in which FIMBank has a participation, also add to operating profitability. Efficiency is improving as shown by its decreasing cost/income ratio to 69% in June-2006 from 81.5% at end-2005. Fitch expects FIMBank’s profitability to continue to grow and support internal capital generation.

Fitch notes that the asset quality is adequate. Gross impaired lending remained stable during H106 at around US$14 million; loan impairment allowances were a good 96%. During 2006, FIMBank experienced an exceptionally strong increase in interbank deposits following new business with banks based in emerging African markets, a trend which is expected to continue as new relationships are forged. The nature of these funds could generate some volatility, not only in FIM’s funding, but also generalised balance-sheet volatility. These funds are then reinvested on the interbank market, avoiding maturity or currency mismatches, generally on primary OECD investment grade banks. Market risk
is moderate while liquidity is adequate.

However Fitch stated that during 2005 and 2006 FIMBank’s capitalisation materially weakened following exceptionally strong growth in risk-weighted on- and off balance- sheet assets. Its eligible capital/risk weighted assets ratio decreased to 15% at end-June 2006, a low level in light of its risk exposure. Given that the current level of internal capital generation is not sufficient to entirely finance its expected growth, the bank must look externally for resources. The rating agency explains that in order to support its growth strategy, the Board of Directors approved plans to increase the bank’s capital to US$100m by end-2007, which Fitch considers achievable. Fitch considers strengthening the bank’s capital an imperative for FIMBank to maintain current rating levels, given its strategy of expanding into more fragile emerging markets. Failure to raise sufficient capital in 2007 would likely put downward pressure on FIM’s ratings and/or Outlook.

The complete report is available upon request.