Fitch Ratings has downgraded FIMbank's long-term Issuer Default Rating to B+ from BB-, and assigned it a negative outlook.

FIMbank is one of five EMEA (Europe, Middle East and Africa) trade finance banks impacted by Fitch action to reflect heightened risks to their credit profiles as a result of COVID-19 disruption on their operations.

Last week Fitch issued a grim credit report for Malta in which it predicted a national economic downturn steeper than that expected by the International Monetary Fund.

The credit rating agency is expecting global economic growth to decline sharply in 2020, with GDP falling by close to two percent in its baseline forecast, followed by a sharp recovery in 2021.

"We also expect growth in the largest emerging markets to fall to 0.7 percent for 2020, before recovering in 2021. 

"Fitch sees asset quality generally weakening, relative to our previous expectations, and for earnings challenges to intensify due to weaker business volumes and rising loan impairment charges," it said on Monday.

The latter could be mitigated following central banks' flexibility in the prudential treatment of loans, backed by public-support measures and the recommendation to avoid excessive pro-cyclical effects when applying the International Financial Reporting Standard 9 accounting standard.

Funding profiles of trade finance banks vary and are typically short-term given the maturities of trade finance activities, it noted in a statement.

Some banks - namely Arap Turk Bankasi, UBAE and Trade Bank of Iraq - have a predominant portion of funds raised from their respective majority shareholders, or related-parties, while other banks rely on cost-sensitive bank- and customer deposits. This includes FIMbank and Banque de Commerce et de Placements.

While Fitch expects refinancing to become more challenging or expensive, monetary policy-support facilities and lower business volumes could relieve funding and liquidity pressures for these banks.

"Capitalisation is acceptable on average across the banks but it could come under pressure from sustained asset-quality deterioration, leading to an increase in capital encumbrance from unreserved non-performing loans, and protracted and material weakening in earnings, it said.

Key rating drivers for FIMbank

The downgrade of FIM's viability rating, which drives the long-term IDR, reflects heightened pressures on the bank's business model, continued asset-quality deterioration and weakened profitability, as reflected in the bank's 2019 financial results.

Fitch also assesses the bank's capitalisation to have weakened, given lower internal capital generation and increased unserved non-performing assets.

"The negative outlook on the long-term IDR reflects our view that the economic and financial-market fallout from the coronavirus outbreak creates additional downside risks to FIM's business model stability, strategy execution, asset quality, capitalisation and earnings.

"The risk of further deterioration in asset quality and earnings is significant given our expectations of a severe downturn in the global economy in 2020."

Additionally, the bank's operating profit is likely to come under further pressure from slower trade activity and higher impairment charges due to a high portion of unreserved non-performing assets (NPAs).

Factors that could lead to negative rating action

The long-term IDR is sensitive to changes in FIM's viability rating (VR). It is still above-average and revenue pressure resulting in weak profitability means that the bank has only moderate rating headroom in the face of the economic disruption posed by the outbreak.

The VR could be downgraded from continued increases in NPA inflows, an expected sustained reduction of operating profitability, expected sustained reduction in the loss absorption capacity - in particular in light of increased unreserved NPAs and further downward revisions of Fitch's expectations of FIM's operating environments.

Factors that could lead to positive rating action

The outlook could be revised to stable if the disruption caused by the pandemic proves to be short-lived and if Fimbank emerges from it with an unscathed financial profile. A positive action would require a strong and sustained improvement in core profitability and asset quality.

How Fitch defines B ratings

B ratings indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met, however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.