Moody’s: Azerbaijan’s Xalq Bank balancing stability, concentration risks

Moody's Ratings has today affirmed Azerbaijan-based OJSC XALQ BANK's Ba3 long-term local and foreign currency bank deposit ratings, Report informs.

The outlook on these ratings remains stable.

"At the same time, we affirmed the bank's Baseline Credit Assessment (BCA) and Adjusted BCA at b1. Concurrently, we affirmed the NP short-term local and foreign currency bank deposit ratings, the bank's Ba2/NP long-term and short-term local and foreign currency Counterparty Risk Ratings (CRRs), and the Ba2(cr)/NP(cr) long-term and short-term Counterparty Risk Assessments (CR Assessments)," reads the message.

The affirmation of XALQ BANK's BCA and Adjusted BCA at b1 reflects the bank's solid pre-provision revenue generation, strong capital position, and sound funding and liquidity, based on a stable deposit base. These strengths are moderated by its vulnerable asset quality because of a large proportion of foreign-currency-denominated loans and substantial single-name credit concentration.

"XALQ BANK's problem loans (PLs; defined as Stage 3 lending) increased slightly, to 5.9% of gross loans, as of year-end 2024 from 5.3% as of year-end 2023. The reported proportion of loan loss reserves to problem loans decreased to 80% from 84% over the same period. We expect that XALQ BANK will maintain control over its asset quality amid an ongoing favorable economic environment in Azerbaijan, with the PL ratio remaining within the 5%-6% range over the next 12-18 months.

XALQ BANK posted net income of AZN66 million ($38.823 million) in 2024, which translated into a return on tangible assets of 2.2%, higher than the historical average of 1.5% over the last five years. This increase is attributed to a strong net interest margin (NIM) of 4.8% and modest provisioning charges. We expect the bank's profitability to moderate amid higher credit costs, but to remain solid over the next 12-18 months, supported by strong NIM and the favourable operating environment.

The bank's Tangible Common Equity (TCE) to Risk Weighted Assets (RWA) ratio was 17.4% as of year-end 2024, up from 16.3% reported a year earlier. This increase was triggered by a 6% reduction in RWAs. Nonetheless, the solid level of capital serves as a good buffer to absorb unexpected credit losses. We expect the bank's TCE/RWA ratio to slightly decline over the next 12-18 months amid resumed RWA growth and ongoing dividend payouts," Moody's noted.

Customer deposits remain XALQ BANK's key funding source, accounting for 76% of its total liabilities as of year-end 2024. Historically, the bank has displayed significant depositor concentration, with its largest 20 depositors accounting for 54% of its total deposits as of year-end 2024, as per management data. These concentration risks are mitigated by a stable customer base and well-established relationships with the largest customers. XALQ BANK's liquidity buffer was around 23% of its total assets as of year-end 2024, which is sufficient to cover any immediate liquidity needs.

XALQ BANK's long-term deposit ratings of Ba3 are based on the bank's BCA of b1 and our assessment of a moderate probability of government support for the bank in the event of need, reflecting its significant market shares by loans and deposits at 6.9% and 5.1%, respectively, as of year-end 2024. This support provides one notch of rating uplift to XALQ BANK's long-term deposit ratings.

"The outlook on XALQ BANK's Ba3 long-term local- and foreign-currency deposit ratings is stable, reflecting our expectation that the bank's credit fundamentals will remain stable over the next 12-18 months, supported by the favourable economic environment in Azerbaijan.

An improvement in XALQ BANK's asset quality, such as a material decrease in its problem loans (PLs), reduction in its single-name credit concentration and further dedollarisation of its loan portfolio, could lead to a rating upgrade.

A sharp erosion in XALQ BANK's recurring revenue or increase in asset risk could trigger a rating downgrade or exert negative pressure on its ratings and outlook. We could also downgrade the bank's deposit ratings if the Government of Azerbaijan appears less likely to continue to support the bank, which is not currently anticipated," the agency added.