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Rating Action:

Moody's takes rating actions on five Azerbaijan banks

09 Aug 2022

London, August 09, 2022 -- Moody's Investors Service ("Moody's") has today upgraded the Baseline Credit Assessments (BCAs) and deposit ratings of four Azerbaijan banks, namely, International Bank of Azerbaijan (IBA), Kapital Bank OJSC (Kapital Bank), OJSC XALQ BANK (Xalq Bank), and OJSC Bank of Baku (Bank of Baku). The outlooks on the long term deposit ratings of these banks has been changed to stable from positive. Concurrently, the rating agency affirmed Joint Stock Commercial Bank Respublika's (Bank Respublika) BCA and deposit ratings with positive outlook.

Specifically, Moody's has:

(1) upgraded to b1 from b2 the BCA and Adjusted BCA of IBA, upgraded to ba3 from b1 the BCA and Adjusted BCA of Kapital Bank, upgraded to b2 from b3 the BCAs and Adjusted BCAs of Xalq Bank and Bank of Baku, and affirmed Bank Respublika's b3 BCA and Adjusted BCA.

(2) upgraded the long-term deposit ratings of IBA to Ba3 from B1, Kapital Bank to Ba2 from Ba3, Xalq Bank to B1 from B2, Bank of Baku to B2 from B3, and affirmed deposit ratings of Bank Respublika at B3.

(3) changed the outlooks on the long-term deposit ratings of International Bank of Azerbaijan, Kapital Bank OJSC, OJSC XALQ BANK and Bank of Baku while maintaining the positive outlook for Bank Respublika.

These rating actions reflect the rating agency's view that the operating environment for Azeri banks will improve in the next 12-18 months, as reflected by the upgrade of Azerbaijan sovereign rating. (For more on Azerbaijan sovereign action please see https://www.moodys.com/research/--PR_467873).

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468539 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

IMPROVING OPERATING ENVIRONMENT IN AZERBAIJAN WILL SUPPORT BANKS ASSET QUALITY AND BUSINESS GENERATION

The rating actions take into account Moody's view that Azeri banks will benefit from an improving operating environment which is underpinned  by stronger economic activity and a stable currency, thanks to high oil prices that are providing sufficient volumes of foreign currency inflows. After having demonstrated resilience throughout the coronavirus pandemic – resulting in a smaller recession than peers and maintaining a stable currency – Azerbaijan is weathering the Russia/Ukraine crisis with a strong economic recovery bolstered by high hydrocarbon prices. Despite Azerbaijan's strong trade links to Russia, the conflict has had limited impact on the economy, and Moody's expects Azerbaijan's real GDP to expand 4% this year. The rating agency expects the resilient economic activity to increasingly translate into stronger business opportunities and better asset quality for banks, improving the banks' standalone credit profiles.

The stable outlooks of the long-term ratings reflect Moody's expectations that the financial performance of the affected banks will remain resilient. Azeri banks' nonperforming loans ratio improved to 4.7% at year-end 2021 from 9.4% as of end of 2019. Moody's expects the current high oil prices and stronger economic output to support banks' asset quality in the next 12-18 months. Consequently, the rating agency expects the banks' nonperforming loans  ratio to remain stable, with limited downside risk. Higher oil prices tend to have a generalised positive impact on Azerbaijan's economy while improved foreign currency liquidity will support the stability of the manat, the local currency, supporting repayment capacity of foreign currency denominated borrowers. The rating agency also expects banks' business opportunities to improve due to higher economic activity, supporting their profitability.

For Bank Respublika, the affirmation of the BCA and its ratings reflects the rating agency's view that the bank's liquidity buffers will remain at a good level while its relatively weaker capital will be sufficient to absorb any adverse asset quality developments following its above-peer loan growth in 2021. The positive outlook reflects expected improvement of the bank's standalone credit profile in the next 12-18 months.

BANK-SPECIFIC FACTORS

-- IBA

The upgrade of the bank's BCA and Adjusted BCA to b1 from b2 reflects strong performance of IBA's loan portfolio as well as its robust profitability and capital adequacy levels. The upgrade of the bank's local and foreign currency long-term bank deposit ratings to Ba3 from B1 reflects both the improved creditworthiness of the bank and Moody's assumption of a high support to the bank from the government of Azerbaijan.

IBA's asset quality continues to benefit from its modest exposure to sectors and segments that were more significantly affected by the pandemic-induced economic disruption. The bank's problem loans to gross loans reduced to 4.2% year-end 2021 and while the rating agency expects it to deteriorate slightly on account of high loan growth in 2021, it will remain contained. Moody's estimates IBA's capital adequacy, as measured by tangible common equity (TCE) to risk-weighted assets (RWA), at 31% as of year-end 2021 and considers this capital cushion, along with pre-provision income, strong enough to absorb higher loan losses. The bank's profitability is underpinned by its strong efficiency, with a cost-to-income ratio of 48% at year-end 2021. IBA also carries large volume of liquid assets, with a ratio of liquid banking assets to tangible banking assets at 68% as of end of 2021 and has a low reliance on market funds. Moody's expects the bank's liquidity to remain high in the next 12-18 months.

-- Kapital Bank

The upgrade of the bank's BCA and Adjusted BCA to ba3 from b1 reflects the healthy performance of its loan book as well as its solid profitability and liquidity. The upgrade of the local and foreign currency long-term bank deposit ratings to Ba2 reflects both the improved creditworthiness of the bank and Moody's assumption of a high support to the bank from the government of Azerbaijan.

Kapital Bank's loan book performance continue to benefit from the bank's  focus on its existing deposit clientele, including payroll customers, budget recipients and pensioners. As of year-end 2021 the ratio of problem loans to gross loans was 3.5%. The bank's capitalisation (TCE/ RWA of 13.6% as of end of 2021) and strong pre-provision profitability (ratio of pre-provision to risk weighted assets was 8.6% in 2021) that is supported by high net interest margins and strong efficiency, provide the bank with good buffers to absorb loan losses. Kapital Bank's reliance on market funds is limited, with a market funds ratio of 6% and a loan-to-deposit ratio of 50%. Concurrently, the bank holds good buffers of liquid assets with the proportion of liquid banking assets to tangible banking assets at 55%. The rating agency expects the liquidity to remain high in the next 12-18 months.

-- Xalq Bank

The upgrade of the bank's BCA and Adjusted BCA to b2 from b3 reflects its improved asset quality as well as its solid capital adequacy level. The upgrade of the local and foreign currency long-term bank deposit ratings to B1 reflects both the improved creditworthiness of the bank and Moody's assumption of a moderate support to the bank from the government of Azerbaijan resulting in one notch of the support uplift from the bank's BCA of b2.

Xalq Bank's ratio of problem loans to gross loans fell to 5.8% at year-end 2021 from 12.8% as of 2020, a combination of the government support programme, the waning impact of the coronavirus pandemic and an improving operating environment. The bank's TCE/RWAs ratio was 21% as of end of 2021, and this solid capitalisation is supported by its high ratio of shareholders equity to total assets which was 19%. This provides the bank with a good buffer to absorb any unexpected loan losses. However, Xalq Bank's profitability, with a net income ratio of 1.2% as of end of 2021, is restrained by its relatively lower net interest margins (3.3% at year-end 2021) and a relatively high cost-to-income ratio (65% in 2021). The bank's market funding has been stable at around 12% while the liquidity ratio has remained stable at 28% after rising from an average of 22% in the last three years prior to the pandemic.

-- Bank of Baku

The upgrade of the bank's BCA and Adjusted BCA to b2 from b3 reflects its improved asset quality and solid capital buffers. The upgrade of the local and foreign currency long-term bank deposit ratings to B2 reflects the improved creditworthiness of the bank. The bank's deposit ratings do not benefit from government support, and therefore the deposit ratings are at the same level with the bank's BCA of b2.

Bank of Baku's problem loans ratio improved to 3.3% as of December 2021 from 8.1% in 2020. The bank focuses on unsecured consumer lending and the rating agency expects limited improvements in loan quality despite a stronger economic performance in Azerbaijan. However, more positively, Bank of Baku's loan book is predominantly denominated in local currency, which limits its vulnerability to exchange rate volatility. In addition, the bank has solid capital with a TCE/RWAs ratio of 21.1% and a shareholders' equity to total assets ratio of 22.6% as of December 2021. The rating agency expect the good capital buffers to provide a sufficient cushion to absorb loan losses. On the funding side, the rating agency considers Bank of Baku's high loan-to-deposit ratio, at 156% as of end of 2021, a credit negative. The bank's reliance on market funds, at 22% of tangible banking assets, was the highest among the Azeri rated banks. The rating agency considers market funding more confidence-sensitive and expensive. However, more positively, the bank's deposits base is more granular, and deposits have been historically stable. Additionally, the bank holds satisfactory level of liquid assets with a liquid banking assets ratio of 21% at end of 2021.

-- Bank Respublika

The affirmation of the bank's BCA and Adjusted BCA at b3 reflects its resilient asset quality and satisfactory liquidity buffers that is moderated by relatively weaker capital. The bank's deposit ratings do not benefit from government support because Moody's assigns a low support assumption, and therefore the deposit ratings are at the same level with the bank's BCA of b3.

Despite Bank Respublika's material focus on small and medium enterprises (SME) lending and unsecured consumer lending, its problem loans to gross loans ratio declined to 2.0% at year-end 2021 from 7.1% in 2020. This is attributed to stronger underwriting standards, stable USD/AZN exchange rate which will likely be supported by higher oil prices, and the scale of state support provided to households, entrepreneurs and SMEs in Azerbaijan following the pandemic. However, the rating agency expects the bank's credit losses to remain elevated, and the problem loans to display some volatility in the near future, but within a tolerable range for a b3 BCA. Bank Respublika's profitability is constrained by weaker efficiency with a cost-to-income ratio of 89% in 2021 and a net income ratio of 0.8%. Bank Respublika's TCE ratio is weaker when compared to its global and domestic peers, and it reduced to 9.6% as of 2021 from 14.5% in 2020. This followed a 59% growth in loans and advances in 2021, which ballooned the banks' risk weighted assets. The rating agency expects the bank's TCE ratio to remain stable in the next 12-18 months because retained earnings will support capital generation, moderating impact of higher risk weighted assets. In line with the high loan growth, the bank's liquid assets ratio declined to 27% in 2021 from 42% in 2020. Moody's expects the funding and liquidity to stabilise at the current levels.

GOVERNMENT SUPPORT ASSUMPTIONS UNCHANGED FOR ALL AFFECTED BANKS

Moody's considers the probability of government support for IBA's and Kapital Bank's deposit ratings to remain high, while that for Xalq Bank's deposits to be moderate. This reflects the first two banks' larger asset and loan book size as well as higher systemic importance. The government support results in one notch of uplift for the three banks' deposit ratings from their respective BCAs. Moody's assumes low probability of government support for deposit ratings of Bank Respublika and Bank of Baku which does not result in any notches of uplift for the two banks' deposit ratings.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The banks' ratings can be upgraded if there are sustained improvements in their financial profiles. For Bank Respublika, an improvement in its capital metrics towards the average of its domestic peers would put upward pressure on its financial profile.

The banks' deposit ratings could be downgraded following a weakness in standalone credit profiles that may result from deteriorating operating conditions, placing pressure on solvency and funding metrics. For Bank Respublika, a downgrade is unlikely over the next 12-18 month because of its positive outlook.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468539 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 issuer/deal page for the respective issuer on https://ratings.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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Peter Mushangwe
Asst Vice President - Analyst
Financial Institutions Group
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

Yaroslav Sovgyra, CFA
Associate Managing Director
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.
© 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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