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Fitch downgrades Crown Agents Bank on expansion worries

Fitch Ratings on Dec. 28 downgraded Crown Agents Bank Ltd.'s long-term issuer default rating to BB from BBB-, citing risks from a planned growth spurt at the U.K.-based emerging market wholesale bank.

The outlook is evolving. The downgrade is Fitch's second of Crown Agents Bank in 2016, following a one-notch reduction to BBB- in May.

Crown Agents Bank, which was acquired earlier in 2016 by Africa-focused private investment firm Helios Investment Partners, is embarking on a significant change to the scale of its business model, Fitch said, adding that execution risks in this new strategy are "material" and "it is yet to be proven whether the bank can deliver on sustainable, improved profitability." The expansion means the bank needs to strengthen systems and risk controls to cope with the increased size and complexity of its business model, the agency added.

To implement the changes, the bank is investing in infrastructure and hiring new staff supported by a recently approved £13 million capital injection from its parent with further funding expected. Even so, Fitch warned, the investment costs remain "burdensome" given the bank's weak profitability and internal capital generation.

In addition to the expansion, Fitch cited risks from the gradual growth in Crown Agents Bank's on- and off-balance-sheet trade finance exposure. The bank is planning a diversified portfolio -- both by geography and counterparty -- but the product still exposes the bank to geopolitical and commodity price risk, Fitch concluded.

Fitch also downgraded Crown Agents Bank's short-term issuer default rating to B from F3 and its viability rating to "bb" from "bbb-," and removed the bank's ratings from Rating Watch Negative. The lender's 5 support rating was affirmed.