FIMBank plc - Credit Rating maintained at ‘BB’

On 1 March, the international credit rating agency Fitch Ratings confirmed FIMBank’s Long-term Issuer Default Rating (IDR) at ‘BB’ with a stable outlook. The other ratings were also maintained as follows: Short-term IDR ‘B’, Individual ‘C/D’, and Support ‘5’. Fitch explained that FIMBank’s ratings reflect its small size, significant but declining exposure to counterparties in emerging and developing countries and concentrations in assets and liabilities. The ratings also take into account FIMBank’s good management, its resilient core profitability and asset quality and near-term plans to strengthen capital.

Fitch stated that although the Return on Equity and Return on assets ratios are improving, they remained subdued during the first half of 2010 at 5.8% and 0.9% respectively, only reflecting a partial recovery of trade-finance markets combined with low interest rates. Fitch expects FIM’s performance to gradually improve in 2011, driven by more dynamic trade-finance business and increasing commodity prices. Loan impairment charges, which absorbed 39% of pre-impairment profit in the first half of 2010, may suffer in 2011 from the Bank’s exposure to uncertain counterparties, although the Bank has demonstrated its ability to maintain credit costs in line with its credit loss absorption capacity.

The ratings agency stated that the Bank is significantly exposed to emerging markets through its lending and forfaiting books and securities portfolio. However, the short-term nature of trade-finance transactions related to the lending and forfaiting books mitigates country risk. Fitch also noted that while FIMBank’s appetite for credit risk is material, the Bank has adequately managed it to date. FIMBank’s impaired-loan ratio remained at an acceptable 3.6% as at 30 June 2010, despite asset quality deterioration at the Bank’s subsidiary in Dubai. Fitch did not expect a material deterioration in asset quality figures at end-2010, given the Bank’s recovery forecasts and tightening of credit policies at the Dubai-based subsidiary.

Moreover, Fitch explained that FIMBank remains wholesale-funded, although its recent focus on attracting deposits from its client base has reduced its reliance on the interbank market (client deposits represented a moderate 44% of non-equity funding at the end of the first half of 2010). The rating agency also commented that there is no significant reliance on capital market for funding. Due to the short-term nature of assets and liabilities, Fitch remarked that FIMBank’s liquidity remains adequate and in addition circa 20% of assets are invested in cash and other liquid items.

Fitch views FIMBank’s capitalization – as measured by the agency’s defined core capital/risk weighted assets ratio (30 June 2010: 18.6%) and regulatory capital ratios (Tier 1 and total regulatory capital ratio at 19.9% and 26.2% at 30 June 2010, respectively) – as only adequate given the Bank’s exposure to credit risk. Given the Bank’s risk profile and its risk appetite, Fitch considers that it must conduct its business with high capital ratios.

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