Moody’s: Asset risk remains elevated due to rapidly grown loan portfolio and Bank of Baku’s business model

Problem loan ratio in Bank of Baku OJSC will not exceed 3-4% in the next 12-18 months amid a favorable economic environment, and ongoing rapid loan book expansion, Report informs referring to Moody’s Investors Service in connection with the affirmation of long-term ratings of bank deposits in national and foreign currencies at B2. The rating outlook has been changed from stable to positive.

“Over the past few years BoB has materially decreased the share of its problem loans thanks to recoveries and write-offs of its restructured legacy loan portfolio. As a result, the problem loan (PL) ratio declined to 2.6% as of year-end 2022 from 8% at the end of 2020.

Meanwhile the PL coverage ratio remained strong at 92% at the end of 2022,” reads the report.

In the rating agency's view, the overall asset risk remains elevated owing to unseasoned nature of its rapidly grown loan portfolio and the bank's business model which is highly focused on unsecured consumer lending.

“The affirmation of the bank's BCA and Adjusted BCA at b2 and the long-term bank deposit ratings at B2 reflects improved quality of the loan portfolio and profitability through the pandemic and lockdowns as well as expected improvement of the bank's standalone credit profile in the next 12-18 months. The positive outlook on the bank's long-term deposit ratings reflects Moody's expectation that the bank is well placed to ensure that these improvements are sustainable over the outlook period,” reads the report.

In 2022, Bank of Baku reported net income of 40.1 million manats ($23.5 million), which translated into a very strong return on tangible assets of 5.8% compared with 6.4% posted in 2021.

“This result was largely associated with strong growth of net interest income on its healthy loan book, to 64.9 million manats ($38.1 million) in 2022 up from 43.7 million manats ($25.7 million) in 2021. In addition, ongoing releases of loan loss reserves on its restructured loan portfolio amounted to 24.7 million manats ($14.5 million) in 2022 and contributed half of the bank's pre-tax income,” reads the report.

Moody's expects a significant reduction of provision release in the next 12-18 months, which should be balanced by strengthening recurring revenues. “If achieved, this would translate into a strong return on tangible assets in 2023-2024 in Moody's central scenario.”

Strong capital adequacy remains one of BoB's key credit strengths, providing a buffer against asset-quality weakness.

At the end of 2022 BoB reported TCE (tangible common equity)/RWA (risk-weighted assets) ratio at 18.1% down from 21.2% at the end of 2021 following 47% loan book expansion last year. Moody's expects moderation of the loan book growth in the next 12-18 months given modest liquidity cushion and the bank's paramount focus on funding costs. In Moody's central scenario TCE/RWA ratio will decline to 16%-17% by the end of 2024.

The Bank of Baku has been operating since 1994. Its authorized capital is 52.87 million manats ($31 million). 35% of the bank’s shares are owned by NAB Holding, 31.1% by Ismayilov Hikmet Abuzer oglu (100% shareholder of Azsigorta OJSC, 99.6% by AFB Bank OJSC), 28.9% by Azpetrol Oil Company LLC, 5% by Isayev Elchin Hamid oglu (chairman of the Supervisory Board).