Moody's Ratings has today affirmed OJSC Bank of Baku's B1 long-term local and foreign currency bank deposit ratings, Report informs.
"The outlook on these ratings remains stable. At the same time, we affirmed the bank's Baseline Credit Assessment (BCA) and Adjusted BCA at b1. Concurrently we affirmed the NP short-term local and foreign currency bank deposit ratings, the bank's Ba3/NP long-term and short-term local and foreign currency Counterparty Risk Ratings (CRRs) and the Ba3(cr)/NP(cr) long-term and short-term Counterparty Risk Assessments (CR Assessments)," reads the message.
The affirmation of Bank of Baku's BCA and Adjusted BCA at b1 reflects the bank's improved asset quality and profitability in recent years. At the same time, the BCA is constrained by the bank's business model focused on the unsecured consumer lending segment, which is sensitive to economic cycles, as well as its modest liquidity cushion.
Over the recent years, the bank has significantly strengthened its risk management and tightened its underwriting standards. The share of Bank of Baku's problem loans (PLs; (defined as stage 3 lending) improved substantially in recent years to 2.6% as of year-end 2024 from 8.0% as of year-end 2020 because of the workout of legacy problems and a denominator effect triggered by a rapid expansion of the loan book. The PL coverage ratio of 93% as of year-end 2024 provides a good buffer to absorb credit losses. In addition, the bank's exposure to foreign-currency loans is negligible at less than 1% of net loans at the end of 2024.
"As of year-end 2024, Bank of Baku reported Tangible Common Equity (TCE)/risk-weighted assets (RWA) of 16.9% down from 17.3% a year earlier. The bank's solvency also benefits from its low leverage. The bank's TCE/total assets ratio was 18.5% as of year-end 2024. Its robust capital adequacy is supported by its strong retained earnings. We expect a gradual reduction in the bank's capital adequacy over the next 12-18 months amid ongoing business expansion and sizeable dividend payouts.
In 2024, Bank of Baku posted net income of AZN27.1 million ($15.941 million) under IFRS, which translates into a return on tangible assets of 2.8%. Strong profitability is supported by robust recurring revenue following the balance-sheet cleanup and the replacement of the legacy problematic loan portfolio. Newly issued loans are of a better quality and generate stable net interest income. We expect Bank of Baku's return on tangible assets to moderate over the next 12-18 months because of (1) ongoing pressure on its net interest margin due to high competition for depositors in the local market, and (2) the gradual phase-out of loan recoveries from the legacy portfolio," Moody's noted.
"As of year-end 2024, customer deposits accounted for 76% of the bank's total liabilities. Meanwhile, market funds, which include long-term state funds used to finance mortgages and support entrepreneurs, accounted for 15% of the bank's tangible banking assets. We consider these funding sources stable and subject to modest refinancing risk. The deposit portfolio is granular and largely represented by retail deposits. Bank of Baku's liquidity buffer was modest at 15% of the bank's tangible assets as of year-end 2024. Although this buffer is modest compared with similarly rated regional and global banks, liquidity risks are mitigated by the short-term duration of the loan book (34% of loans or 24% of assets mature within a year according to the local GAAP report as of March 2025).
Bank of Baku's long-term deposit ratings of B1 are based on the bank's BCA of b1 and do not benefit from any external support because of our assumption of low probability of government support from the Government of Azerbaijan.
The stable outlook on Bank of Baku's long-term deposit ratings reflects our expectation that the bank will maintain its robust credit metrics over the next 12-18 months," reads the message.
Bank of Baku's BCA and long-term bank deposit ratings could be upgraded if it significantly improves its liquidity and funding profile while maintaining sound solvency.
Bank of Baku's ratings could be downgraded or its outlook changed to negative if there is an erosion in its financial fundamentals, such as liquidity, asset quality or profitability.