Fitch: Top 25 borrowers account for over 70% of Azerbaijani AFB Bank’s corporate, SME loans

Fitch Ratings has assigned Azerbaijan-based AFB Bank Open Joint Stock Company (AFB) Long-Term Issuer Default Ratings (IDRs) of 'B' with Stable Outlooks, Report informs.

Fitch has also assigned AFB a Viability Rating (VR) of 'b' and Government Support Rating (GSR) of 'no support.'

AFB is a small bank, making up less than 1% of sector assets and deposits at end-1H25. Fitch assesses AFB's underwriting standards as weak, due to sizable single-name loan concentrations, translating into volatile loan quality and growth: "We estimate that the 25 largest borrower groups exceeded 70% of the corporate and SME portfolio at end-2024, with the bulk comprising relationship-based exposures. We expect loan growth to accelerate to above 20% a year in 2025 and 2026 (2024: 1.7%), in line with the bank's expansion strategy, mainly driven by retail and SME lending."

"Impaired loans (Stage 3 under IFRS 9) decreased slightly to 14.4% of gross loans at end-2024 (end-2023: 15.6%), supported by large write-offs (2024: 7.6% of average loans). Stage 2 loans remained a low 1.4% of gross loans at end-2024 (end-2023: 2%). Total reserve coverage of Stage 3 loans reduced to an acceptable 60% at end-2024 (end-2023: 86%). We expect the bank's impaired loans ratio to decrease gradually to 10% in 2025 and 2026, supported by resumed loan growth.

The bank's pre-impairment operating profit exceeded 3% of average loans in 2022-2024, after being negative in 2021. However, this provides only a moderate buffer to absorb credit losses, given AFB's high loan concentrations. The operating profit/risk-weighted assets (RWAs) ratio gradually reduced to a still-adequate 2.9% in 2024 (2021: 7.3%), and we expect it to normalise at 2% in 2025-2026, due to higher credit losses," reads the message.

"AFB's Fitch Core Capital (FCC) ratio declined to a still robust 36% at end-2024 (end-2023: 39%), due to full distribution of 2023 net income as dividends and 3% RWAs growth. The regulatory Tier 1 capital ratio was also high at 32% at end-1H25. In our view, AFB's capital buffer will be partly used for substantial loan growth in 2025 and 2026. However, the FCC ratio will likely stay above 20%, and could be supported by a capital injection from the major shareholder. Customer deposits made up 61% of liabilities at end-2024, while wholesale funds accounted for a notable 36%. The latter primarily comprises low-cost, long-term loans from state development institutions. The deposit base is highly concentrated by name, including related parties and companies affiliated with a conglomerate. The bank's liquidity buffer was adequate at end-2024, covering 48% of deposits," Fitch noted.

AFB's VR and Long-Term IDRs could be downgraded on a material weakening of capitalisation due to for instance, loss-making performance or rapid loan growth. Furthermore, a significant weakening of liquidity, particularly as a consequence of substantial deposit outflows from the largest corporate customers, could also be credit negative.

Upside potential for AFB's VR and Long-Term IDRs is limited and would necessitate a substantial strengthening of the commercial franchise, a more diversified business model, and material enhancements to its risk management framework.

The bank's 'B' Short-Term IDRs are the only possible option mapping to the 'B' Long-Term IDRs.