Fitch: IBA eliminates legacy currency risks affecting its creditworthiness

The return of the International Bank of Azerbaijan (IBA) on average equity is expected to be around 15% in 2022-2023, supported by wide margins and a pick-up in loan growth (at least 25% in 2022 and about 15% in 2023), Report informs referring to Fitch Ratings.

Fitch Ratings has upgraded OJSC IBA Long-Term Issuer Default Rating (IDR) to 'BB-' from 'B'. The Outlook is Stable. Fitch has also upgraded the bank's Viability Rating to 'bb-' from 'b'.

“IBA is mostly deposit-funded (87% of total liabilities at end-2Q22). Deposit concentration is very high, with an outsized contribution from state-owned corporates (56% of end-2Q22 liabilities), although we view the largest depositors as core for IBA. Its liquidity buffer is substantial in both foreign and local currencies, as expressed by a low 37% gross loans/deposits,” Fitch noted.

IBA's impaired loans (Stage 3 loans under IFRS 9) equaled a low 4.1% of gross loans at end-2Q22 and were 1x covered with reserves. Stage 2 loans added another 3.4% of gross loans. Fitch sees no unrecognized problem loans among IBA's largest corporate exposures. IBA's largest loans are generally of moderate-to-low credit risk in the local context, although industry concentrations are high, with 28% of corporate lending exposed to construction and real estate.

“IBA's recurring annual pre-impairment profit is equal to a high 10% of average gross loans, translating into considerable loss absorption capacity. Since 2017 profitability has additionally been supported by loan recoveries, stemming from some work-outs of legacy problem loans,” reads the message.

In July, IBA closed its long-standing short-currency position (1Q22: $470 million or 60% of regulatory capital) through purchases of foreign-currency liquidity from the Central Bank of Azerbaijan (CBA), thereby eliminating significant legacy currency risks. Fitch views the elimination of currency risks as the final step in a decisive resolution of the legacy issues that had previously weighed on IBA's credit profile.

IBA's Fitch core capital ratio was a high 32% at end-2Q22. Regulatory capital ratios are lower, with a total capital ratio of 19.9%, due to some deductions from regulatory capital and a higher risk-weighted assets (RWAs)/total assets ratio.

“We expect capital ratios to remain comfortable in the medium term, but for them to trend down on considerable dividend pay-outs (IBA paid around 85%-90% of net profit in 2020-2022) amid higher RWAs growth,” the agency noted.

IBA is the largest bank in Azerbaijan with 19% and 28% shares in sectoral loans and deposits, respectively. The bank is 96.37% owned by the government of Azerbaijan.