Fitch expects ABB’s impaired loan ratio to remain below 5% in 2023-2024

Fitch Ratings has revised OJSC International Bank of Azerbaijan's (ABB) Outlook to Positive from Stable, Report informs referring to the rating agency’s website.

The bank's Viability Rating (VR) and Long-Term Issuer Default Ratings (IDRs) have been affirmed at 'bb-' and 'BB-', respectively.

The Positive Outlook on the bank's IDRs reflects Fitch's expectations that ABB will benefit from a favorable operating environment in terms of revenue generation and business volumes.

ABB is the largest bank in Azerbaijan, making up 26% of sector assets and 20% of sector loans at end-1H23. This results in the bank's strong domestic franchise and considerable pricing power. ABB is 96% state-owned.

“At end-1H23, net loans made up just 33% of total assets, while non-loan exposures are mostly of at least 'BB+' credit quality. This balance-sheet structure translates into ABB’s asset quality and profitability being more resilient than domestic peers, as well as into solid capital and liquidity buffers,” reads the report.

“ABB’s impaired loans (Stage 3 loans under IFRS 9) equaled a modest 4.3% of gross loans at end-1H23 and were 1x covered by total loan loss allowances. Stage 2 loans added another 0.9%. Fitch believes the largest corporate exposures are adequately classified and provisioned.

We expect the impaired loan ratio to remain below 5% in 2023-2024, although elevated loan growth may result in a higher cost of risk, due to portfolio seasoning,” Fitch noted.

“The bank's annualized net interest income rose to 4.9% of average earning assets (including cash and cash equivalents) in 1H23 (2022: 3.9%). Coupled with good operating efficiency (cost/income ratio was 41%), this led to a strong pre-impairment profit, covering a high 11% of average gross loans. As a result, ABB’s annualized operating profit/risk-weighted assets (RWAs) ratio was a high 6.4% in 1H23 (2022: 6.6%). We expect the bank's operating profitability to moderate in the medium term, but to remain strong.”

“ABB’s Fitch Core Capital (FCC) ratio was a high 30% at end-1H23, down from 32% at end-2022. We expect ABB’s FCC ratio to reduce towards 24% in the medium term due to fast loan growth (we estimate 30% in 2023 and 25% in 2024) and considerable dividend pay-outs,” reads the report.

“The bank is mostly deposit-funded (end-1H23: 87% of total liabilities). Single-name deposit concentration is very high, with an outsized contribution from state-owned corporates (end-1H23: 60% of total deposits), but we view these depositors as stable and core. ABB’s liquidity buffer is substantial in both local and foreign currencies, as reflected by a gross loans/customer deposits ratio of 46%.”

“The Outlook on ABB could be revised to Stable due to either of the following:

- A renewed material loan-quality pressure, for example, stemming from fast expected loan growth;

- A significant moderation of capital/liquidity buffers due to a combination of fast growth and large dividend pay-outs.”