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Rating Action:

Moody's upgrades OJSC's Bank of Baku deposit ratings to Caa1, stable outlook

27 Nov 2019

London, 27 November 2019 -- Moody's Investors Service ("Moody's") has today upgraded OJSC Bank of Baku's (Bank of Baku) long-term local and foreign currency deposit ratings to Caa1 from Caa3, and its baseline credit assessment (BCA) and Adjusted BCA to caa1 from caa3. The outlook on Bank of Baku's long-term deposit ratings remains stable. The bank's long-term local and foreign currency Counterparty Risk Ratings (CRR) were also upgraded to B3 from Caa2, and its long-term Counterparty Risk Assessment (CR Assessment) was upgraded to B3(cr) from Caa2(cr). The bank's Not Prime short-term local and foreign currency deposit ratings, its Not Prime short-term local and foreign currency CRRs and Not Prime(cr) short-term CR Assessment were affirmed.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The ratings upgrade reflects Moody's assessment that the bank's solvency metrics have materially improved following the implementation of the government's measures for support of a certain group of qualifying individual borrowers. Bank of Baku is among those local banks benefitting the most from this set of measures, because it has historically focused on retail lending and had, by the time of announcement of the government's programme, accumulated a large stock of distressed retail loans subject to resolution aided by the government's measures.

Although the implementation of the support programme is still under way, its main part representing compensations to both the borrowers and the banks that suffered from the devaluation of Azeri manat in 2015, has been already completed allowing Bank of Baku to post in 2019 year-to-date a big one-off profit from the release of loan loss reserves relating to resolved loans. This, in turn, boosted Bank of Baku's capital metrics bringing them in compliance with the regulatory requirements set at AZN50 million in nominal terms and 10% in terms of a total capital adequacy (CAR) level. As of 30 September 2019, Bank of Baku reported it its financial statement prepared under local GAAP a capital base of AZN56 million and total regulatory CAR of 26%.

In the absence of a detailed asset quality disclosure post-implementation of the government measures, Moody's assesses that Bank of Baku's problem loan ratio will still remain high as of the end of 2019, at above 30% of total gross loans. Nevertheless, this is a significant decline compared to 55% problem loan ratio reported as of the end of 2018. Furthermore, the rating agency estimates that Bank of Baku's coverage of problem loans by loan loss reserves now exceeds 80%, whereas its ratio of problem loans to the sum of tangible common equity and loan loss reserves has declined to approximately 70% as of November 2019 from the close-to-100% ratio reported as of the beginning of 2019.

The growing proportion of performing loans in Bank of Baku's loan book, a result of both the government's measures and the resumed organic business growth, will benefit the bank's profitability metrics, and the rating agency expects that the bank will be close to a break-even performance in 2020, on the recurring basis, i.e. net of any one-off effects from the government measures.

Bank of Baku's funding and liquidity position will also benefit as a result of the government support programme, because the improved solvency position and return to compliance with the regulatory requirements have reduced the probability of any punitive actions from the regulator, which will improve the bank's perception by its depositors and will allow it to leverage access to customer funding.

WHAT COULD MOVE THE RATINGS UP / DOWN

An upgrade of Bank of Baku's BCA and long-term deposit ratings could occur if the bank (1) demonstrates organic improving trends in asset quality as a result of a continuing workout of its legacy problem loans and a prudent new credit underwriting, and (2) enhances its earnings generation.

Bank of Baku's BCA and long-term ratings could be lowered in the case of a deterioration of the bank's asset quality and profitability metrics and erosion of its capital. A weakening of the bank's liquidity and funding profile might also result in the ratings downgrade.

LIST OF AFFECTED RATINGS

Issuer: OJSC Bank of Baku

..Upgrades:

....Long-term Counterparty Risk Ratings, upgraded to B3 from Caa2

....Long-term Bank Deposit Ratings, upgraded to Caa1 from Caa3, outlook remains Stable

....Long-term Counterparty Risk Assessment, upgraded to B3(cr) from Caa2(cr)

....Baseline Credit Assessment, upgraded to caa1 from caa3

....Adjusted Baseline Credit Assessment, upgraded to caa1 from caa3

..Affirmations:

....Short-term Counterparty Risk Ratings, affirmed NP

....Short-term Bank Deposit Ratings, affirmed NP

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

..Outlook Action:

....Outlook remains Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

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 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.

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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