OREANDA-NEWS. Fitch Ratings has revised Eastern and Southern African Trade and Development Bank's (PTA Bank) Outlook to Stable from Negative and affirmed its Long-Term Issuer Default Rating (IDR) at 'BB'. The Short-Term IDR has been affirmed at 'B'. A full list of rating actions is at the end of this rating action commentary.

The revision of the Outlook reflects the improvement in the bank's credit quality, and in particular the clearance of the arrears on the facility granted to Zambia (B/Negative).

KEY RATING DRIVERS

The ratings and Stable Outlook reflect the following key rating drivers:

The large facility granted by PTA Bank to Zambia to fund oil imports is now performing. As a result of a significant build-up of arrears, this facility was rescheduled in July 2015 over 18 months ending in December 2016. In addition, the impaired loan ratio had further reduced to 2.7% at end-2015 (4.7% in 2013) and remained at this level in 1H16.

After a period of rapid rise in operations, the loan portfolio decreased in 1H16. As PTA Bank is primarily involved in trade finance (77.1% of banking portfolio at end-June 16, including off-balance-sheet commitments), the reduction in asset value is partly due to lower commodity prices and their overall negative impact on trade. At the same time, shareholder equity has increased as a result of disbursements under the 2013 special capital increase and of sizeable profits generated by the bank, the greater part of which is retained in equity. The bank will open its capital to new countries, and further capital payments are expected to be received.

Growth in lending will resume in 2017, and will be more focused on project loans and infrastructure finance. According to Fitch's projections, this will lead to a moderate decline in the equity to asset ratio. In addition, the share of private borrowers, which has been reduced to half of the loan portfolio in 1H16, will increase, which will put pressure on asset quality.

Concentration has been affected by the focus of trade facilities to Zambia and Sudan. The bank holds a large portfolio of Malawi bonds, funded by deposits of the Malawi central bank. The reorientation of lending to the private sector will improve diversification over time, and the ratio of the five largest exposures to total exposure should converge towards 50% over the medium term.

Liquidity is sound overall, due to the short maturity of loans and, to a lesser extent, substantial unused, albeit mostly uncommitted, bank facilities. Liquid assets covered 80% of short-term debt at end-2015. However, the quality of treasury assets is weak, with less than 5% invested in banks rated 'AA-' or above. The bank has access to funding from international banks and development institutions. It issued a Eurobond in 2013, which will mature in 2018.

The bank's business environment presents substantial risks. This mainly stems from its operating environment. Countries of operation are low income, and their business climates are weak. The bank's strategy, characterised by steady growth in project loans to private sector companies in East Africa and trade finance facilities to countries with low credit quality, presents significant risk, in Fitch's view.

Shareholders' capacity to support PTA Bank is low, with an average rating of key shareholders of 'B-' at end-June 2016. Furthermore, in Fitch's view, the propensity of key shareholders to provide support in case of need is fairly weak.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's expectation that the average rating of key shareholders will remain stable. Developments, either individually or collectively, that could lead to a rating action, are as follows:

-The ratings would be negatively impacted by an accumulation of arrears on private sector loans or a default on one of its large sovereign exposures (Zambia, Sudan, Malawi). They would also be affected by a material deterioration in capitalisation, due to rapid rise in lending, or by a marked deterioration in liquidity indicators

- A substantial increase in capital or a marked reduction in the size of the banking portfolio, leading to an improvement in capital ratios, would have positive rating implications.

KEY ASSUMPTIONS

Fitch assumes no material change in the economic growth outlook for the East and Southern African region and no significant change in commodity prices in the short term.

The full list of rating actions is as follows:

- Long-Term IDR: affirmed at 'BB', Outlook revised to Stable from Negative

- Short-Term IDR: affirmed at 'B'

- Long-Term National Rating: affirmed at 'AAA(ken)', Outlook Stable

- USD1bn senior unsecured medium term note programme: affirmed at 'BB'/'B'

- Senior unsecured notes: affirmed at 'BB'