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Rating Action:

Moody's takes actions on four rated Azerbaijani banks

16 Apr 2019

London, 16 April 2019 -- Moody's Investors Service today upgraded the long-term local and foreign currency deposit ratings of three Azerbaijani banks, namely International Bank of Azerbaijan (IBA), Joint Stock Commercial Bank Respublika (Respublika) and OJSC XALQ BANK (Xalq). The outlooks on the long-term deposit ratings of Respublika and Xalq were changed to stable from positive, and the outlook on the long-term deposit ratings of IBA remains positive. Moody's also upgraded these three banks' long-term Counterparty Risk Ratings (CRRs) and Counterparty Risk Assessments (CR Assessments). Concurrently, Moody's upgraded these three banks' baseline credit assessments (BCAs) and Adjusted BCAs. The three banks' short-term local and foreign currency deposit ratings and short-term CRRs of Not Prime and short-term CR Assessments of Not Prime(cr) were affirmed.

At the same time, Moody's affirmed the long-term and short-term local and foreign currency deposit ratings, long-term and short-term CRRs and long-term and short-term CR Assessments of OJSC Bank of Baku (BoB) and changed the outlook on the bank's long-term deposit ratings to stable from negative.

Please see the full list of affected credit ratings at the end of this press release.

RATINGS RATIONALE

The rating action primarily reflects positive developments in the affected banks' standalone credit profiles, facilitated by Azerbaijan's stabilizing macroeconomic environment and improving operating conditions for the local banks. GDP growth in Azerbaijan of about 3% in 2019, along with lower inflation and a stable exchange rate, should underpin the creditworthiness of the borrowers.

UPGRADE OF IBA'S BCA

The upgrade of IBA's BCA to b3 from caa2 reflects the positive impact on the bank's solvency metrics stemming from (1) improved asset quality, restored capital buffers and robust net income; as well as (2) a material reduction in the bank's short foreign currency position reducing the susceptibility of its profits and capital to exchange rate volatility.

IBA's profitability improved following its restructuring, thanks to decreased funding and operational costs, as well as the replacement of problem loans with yielding liquid assets. As a result, in 2018, under local GAAP, the bank posted net income of AZN426 million (or AZN295 million, if adjusted for release of provisions), a strong return on average assets (ROAA) of 3.5%. Based on the current balance sheet structure, Moody's expects IBA to generate robust pre-provision income in the next 12 to 18 months.

Moody's estimates IBA's ratio of tangible common equity to total risk-weighted assets (TCE/RWA ratio) to be 28.5% as of 1 January 2019, up from 26.2% a year before, and expects this strong capital cushion to be sustained over the next 12 to 18 months. However, capital is still sensitive to exchange rate movements, given a short foreign-currency position of $1.0 billion as of 1 March 2019, equivalent to the bank's Tier 1 capital base, albeit down from $1.9 billion as of year-end 2017 thanks to foreign currency purchases. IBA intends to close this position next year.

UPGRADE OF RESPUBLIKA'S BCA

The upgrade of Respublika's BCA to b3 from caa1 reflects improvements in the bank's profitability and asset quality.

Based on local GAAP reports, Respublika posted net income of AZN2.2 million in 2018, compared with a net loss of AZN10.5 million in 2017. Quarterly pre-provision income improved steadily to about AZN3.2m in Q3-Q4 2018 compared with an average of AZN1.2m in 2017. Moody's believes that Respublika completed the provisioning of its legacy portfolio in 2018, and expects a normalization of provisioning charges at lower levels in 2019-20 which, together with improving pre-provision profitability, will translate into stronger net profits in the next 12 to 18 months.

The asset quality improvement is driven by both amortization of the old portfolio and the increasing share of new lending disbursed under tighter underwriting standards, and the improving trend will continue as the loan book expands through 2019-20. The stabilized economic conditions in Azerbaijan should benefit the creditworthiness of households and small and medium-sized entities, Respublika's key customer segments.

UPGRADE OF XALQ'S BCA

The upgrade of Xalq's BCA to b3 from caa1 reflects the recent improvements in the bank's asset quality and profitability, coupled with its sound capital buffer.

According to Xalq's management data, loans overdue by more than 90 days stood at 10.0% of the bank's gross loan book as of year-end 2018, compared to the 12.7% and 14.6% problem loan ratios reported under IFRS as of year-end 2017 and year-end 2016, respectively. Credit losses (defined as loan-loss provisions as a percentage of average gross loans) were 1.8% in 2018, effectively flat versus the 1.9% level reported in 2017 and much lower than the 3.7% ratio reported in 2016. As of year-end 2018, loans overdue by more than 90 days were 82% covered by loan loss reserves, which is sufficient, in Moody's view.

According to unaudited management accounts prepared under IFRS, in 2018, Xalq posted net income of AZN25.2 million, an ROAA of 1.3%. Moody's expects this profitability level to be sustained over the medium term. The rating agency estimates Xalq's TCE/RWA ratio to be 12.9% as of 1 January 2019, and forecasts that the bank will be able to preserve this capital adequacy level in 2019, owing to its improved internal capital generation coupled with moderate projected growth in its risk-weighted assets.

GOVERNMENT SUPPORT ASSUMPTIONS UNCHANGED FOR ALL AFFECTED BANKS

Moody's considers the probability of government support for IBA's deposits to be high, while that for Xalq's deposits to be moderate. This reflects the two banks' respective sizes and systemic importance and results in two and one notches of uplift, respectively, for the banks' deposit ratings from their respective BCAs.

UPGRADE OF IBA, RESPUBLIKA AND XALQ'S LONG-TERM DEPOSIT RATINGS, LONG-TERM CRRs AND LONG-TERM CR ASSESSMENTS

The upgrade of IBA, Respublika and Xalq's long-term local and foreign currency deposit ratings, as well as the upgrade of their long-term CRRs and CR Assessments was driven by the upgrade of these banks' BCAs.

STABLE OUTOOKS ON RESPUBLIKA AND XALQ'S LONG-TERM DEPOSIT RATINGS

The stable outlooks on Respublika and Xalq's long-term deposit ratings reflect Moody's expectation that the banks' credit profiles will broadly remain unchanged over the next 12 to 18 months.

POSITIVE OUTLOOK ON IBA'S LONG-TERM DEPOSIT RATINGS

The positive outlook on IBA's long-term deposit ratings incorporates Moody's expectation that the improving trends in the bank's solvency metrics will continue over the next 12 to 18 months and may eventually lead to an upgrade of the bank's BCA and its long-term deposit ratings.

STABLE OUTLOOK ON BOB'S LONG-TERM DEPOSIT RATINGS

The change of the outlook on BoB's Caa3 long-term deposit ratings to stable from negative reflects Moody's expectation that the bank's solvency metrics will somewhat improve and then stabilize at more sustainable levels following the upcoming implementation by the government of its recently announced measures for support of a certain group of qualifying individual borrowers. The rating agency believes that BoB will be among those local banks benefitting the most from the announced measures, because it has historically focused on retail lending and has accumulated large stock of distressed retail loans subject to resolution aided by the government's support measures.

The rating agency estimates that, upon full implementation of the government's programme, BoB's level of problem loans (a substantial 45% of total loans as of year-end 2017) might decrease by approximately one quarter. This, in turn, will trigger a significant release of loan loss reserves, which will boost BoB's profitability metrics and capital.

These expected positive developments are, however, counterbalanced by the gradual tightening of BoB's liquidity position, because the bank's customer deposit funding shrank by one quarter in 2018, whereas its liquidity cushion reduced, over the same period, to approximately 15% of total assets from the more than 20% ratio reported as of the beginning of 2018.

WHAT COULD MOVE THE RATINGS UP

The long-term deposit ratings of the four Azerbaijani banks affected by this rating action could be upgraded if the banks post improved standalone credit metrics that lead to higher BCAs.

WHAT COULD MOVE THE RATINGS DOWN

The BCAs, and hence the long-term deposit ratings of the four Azerbaijani banks affected by this rating action could be downgraded, or the ratings outlooks could be lowered, if the banks' financial fundamentals deteriorate significantly and beyond Moody's current expectations.

In the case of IBA and Xalq, whose ratings benefit from the government support uplift, a downgrade of their long-term deposit ratings might also be driven by the downgrade of Azerbaijan's sovereign debt rating. However, this is unlikely, given the stable outlook assigned by Moody's on Azerbaijan's Ba2 sovereign rating.

The principal methodology used in these ratings was Banks published in August 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF ALL AFFECTED RATINGS

Issuer: International Bank of Azerbaijan

..Upgrades:

.... Baseline Credit Assessment, Upgraded to b3 from caa2

.... Adjusted Baseline Credit Assessment, Upgraded to b3 from caa2

.... Long-term Bank Deposits, Upgraded to B1 from B3, Outlook Remains Positive

.... Long-term Counterparty Risk Assessment, Upgraded to Ba3(cr) from B2(cr)

.... Long-term Counterparty Risk Rating, Upgraded to Ba3 from B2

..Affirmations:

.... Short-term Bank Deposits, Affirmed NP

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Rating, Affirmed NP

..Outlook Action:

....Outlook Remains Positive

Issuer: Joint Stock Commercial Bank Respublika

..Upgrades:

.... Baseline Credit Assessment, Upgraded to b3 from caa1

.... Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

.... Long-term Bank Deposits, Upgraded to B3 from Caa1, Outlook Changed To Stable From Positive

.... Long-term Counterparty Risk Assessment, Upgraded to B2(cr) from B3(cr)

.... Long-term Counterparty Risk Rating, Upgraded to B2 from B3

..Affirmations:

.... Short-term Bank Deposits, Affirmed NP

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Rating, Affirmed NP

..Outlook Action:

....Outlook Changed To Stable From Positive

Issuer: OJSC Bank of Baku

..Affirmations:

.... Baseline Credit Assessment, Affirmed caa3

.... Adjusted Baseline Credit Assessment, Affirmed caa3

.... Long-term Bank Deposits, Affirmed Caa3, Outlook Changed To Stable From Negative

.... Short-term Bank Deposits, Affirmed NP

.... Long-term Counterparty Risk Assessment, Affirmed Caa2(cr)

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Long-term Counterparty Risk Rating, Affirmed Caa2

.... Short-term Counterparty Risk Rating, Affirmed NP

..Outlook Action:

....Outlook Changed To Stable From Negative

Issuer: OJSC XALQ BANK

..Upgrades:

.... Baseline Credit Assessment, Upgraded to b3 from caa1

.... Adjusted Baseline Credit Assessment, Upgraded to b3 from caa1

.... Long-term Bank Deposits, Upgraded to B2 from B3, Outlook Changed To Stable From Positive

.... Long-term Counterparty Risk Assessment, Upgraded to B1(cr) from B2(cr)

.... Long-term Counterparty Risk Rating, Upgraded to B1 from B2

..Affirmations:

.... Short-term Bank Deposits, Affirmed NP

.... Short-term Counterparty Risk Assessment, Affirmed NP(cr)

.... Short-term Counterparty Risk Rating, Affirmed NP

..Outlook Action:

....Outlook Changed To Stable From Positive

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Olga Ulyanova
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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