Moody's Ratings has upgraded International Bank of Azerbaijan's (also known as ABB Bank) long-term local and foreign currency bank deposit ratings to Ba1 from Ba2 and changed the outlook on these ratings to stable from positive, Report informs.
"Concurrently, we upgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to ba2 from ba3, upgraded the bank's long-term local and foreign currency Counterparty Risk Ratings (CRRs) to Baa3 from Ba1, and upgraded the long-term Counterparty Risk Assessment (CR Assessment) to Baa3(cr) from Ba1(cr). In addition, we affirmed the Not Prime (NP) short-term local and foreign currency bank deposit ratings, and upgraded the short-term CRRs and CR Assessment to P3/P3 (cr) from NP/NP(cr), respectively," reads the message.
The upgrade of International Bank of Azerbaijan's BCA to ba2 from ba3 reflects the bank's sustained track record of improved profitability, good asset quality, strong capital buffers, ample liquidity along with limited reliance on market funding.
The rating action also reflects the agency's view that the International Bank of Azerbaijan, as the largest bank in the country, will benefit from a favorable operating environment in Azerbaijan supported by the government's ongoing efforts to diversify the economy. This, in turn, will translate into stronger business opportunities while supporting its asset quality and profitability.
The upgrade of International Bank of Azerbaijan's local and foreign currency long-term bank deposit ratings to Ba1 from Ba2 follows its BCA upgrade. International Bank of Azerbaijan's long-term deposit ratings are based on the bank's BCA of ba2 and our assessment of a high probability of government support from the Government of Azerbaijan in case of need, based on the bank's government ownership and its status as the largest bank in the country with large market shares in both loans and customer deposits. This support translates into a one-notch rating uplift to the bank's long-term deposit ratings from its ba2 BCA.
International Bank of Azerbaijan's asset quality stabilized in 2024 following a material improvement in 2023. Problem loans (Stage 3 under IFRS 9) stood at 3.5% of total loans at year-end 2024, down from 4.6% at year-end 2022. Coverage of problem loans by loan loss reserves remained strong at 108%. We expect asset quality to remain stable, supported by favorable economic conditions in Azerbaijan and improved loan portfolio diversification, particularly in consumer loans and mortgages.
The bank's profitability has improved in recent years and will remain robust over the next 12–18 months. This positive trend is driven by the bank's increased focus on the high-margin retail sector, which now accounts for around 50% of its loan portfolio, and a higher proportion of interest-earning assets. As a result, the net interest margin widened to 5.2% in 2024, up from 4.9% in 2023 and 3.9% in 2022. Return on tangible assets reached 2.6% in 2024, compared to 2.1% in 2022, and will likely remain at this level over the next 12–18 months.
International Bank of Azerbaijan's strong capital position remains a key credit strength. Tangible common equity (TCE) to risk-weighted assets (RWA) will remain above 20% over the next 12–18 months, supported by solid internal capital generation and moderate asset growth.
International Bank of Azerbaijan's funding profile will remain stable with limited refinancing risk. The bank will continue to rely predominantly on customer accounts, which represented 91% of total liabilities at end-2024. Although the bank has recently returned to international financial markets, its market funding will remain below 10% of its tangible banking assets in the next 12-18 months. Liquidity buffers will remain ample, at around 30–40% of tangible assets, consisting mainly of cash, central bank balances, US Treasury bills, and government-related bonds.
The outlook on the International Bank of Azerbaijan's long-term deposit ratings is stable, reflecting the agency's expectation that the bank will maintain sound financial fundamentals over the next 12–18 months.
Sustained improvement in asset quality and profitability, and further improvement of the operating environment in Azerbaijan could lead to an upgrade of the bank's BCA and deposit ratings. Conversely, the ratings could be downgraded if there are signs of material erosion of the bank's financial fundamentals, such as asset quality and profitability, or if the likelihood of government support declines.