Moody’s: Favorable economic situation to support asset quality of Azerbaijan’s Bank Respublika

Moody's Ratings has today upgraded Azerbaijan-based Joint Stock Commercial Bank Respublika's long-term local and foreign currency bank deposit ratings to Ba3 from B1 and changed the outlook on these ratings to stable from positive, Report informs.

"Concurrently, we upgraded the bank's Baseline Credit Assessment (BCA) and Adjusted BCA to b1 from b2, upgraded the bank's long-term local and foreign currency Counterparty Risk Ratings (CRRs) to Ba2 from Ba3, and upgraded the long-term Counterparty Risk Assessment (CR Assessment) to Ba2(cr) from Ba3(cr). In addition, we affirmed the Not Prime (NP) short-term local and foreign currency bank deposit ratings, NP short-term local and foreign currency CRRs and the NP(cr) short-term CR Assessment," reads the message.

The upgrade of Bank Respublika's BCA to b1 from b2 was driven by the bank's sustained track record of improved financial performance, particularly in asset quality, profitability, and capital adequacy.

"The upgrade of the long-term bank deposit ratings to Ba3 from B1 reflects a one-notch uplift for government support from the Government of Azerbaijan (Baa3 positive). This is based on our assumption of a moderate probability of support, given the bank's sizable market share of 4.4% by assets at year-end 2024.

Bank Respublika's b1 BCA is underpinned by its strong asset quality, with problem loans declining to 1.2% at year-end 2024, down from 1.4% at year-end 2023. Reserve coverage of problem loans stood at approximately 140%. We expect asset quality to remain supported by favorable economic conditions in Azerbaijan and the bank's well-diversified loan portfolio.

Thanks to its strategic focus on the SME and retail sectors, Bank Respublika's profitability has improved in recent years and will remain supported by healthy margins and robust fee and commission income. In 2024, the bank reported a record-high net profit of AZN51 million [$29.999 million] (AZN39 million [$22.941 million] in 2023), equivalent to a 2.4% return on tangible assets. We expect profitability to be sustained at this level over the next 12–18 months.

We anticipate that Bank Respublika's currently modest capital adequacy ratios will continue to improve in 2025. The TCE/RWA ratio will likely increase to around 10% over the next 12 months, up from 9.4% at year-end 2024 and 8.3% in 2023, supported by strong internal capital generation and slower loan book expansion, which eases pressure on capital. As of 31 March 2025, the bank reported regulatory Total Capital Adequacy Ratio (CAR) of 14.07% and Tier 1 capital ratio of 9.55%, up from 12.55% and 8.97%, respectively, as of 31 March 2024," Moody's noted.

"Bank Respublika's customer deposits accounted for 70% of total liabilities but remain concentrated. The bank is actively working to diversify its funding base, and we believe it is well-positioned to manage potential deposit outflows. Wholesale funding—primarily sourced from international development institutions and foreign investment funds—will remain stable and moderate in volume, representing around 20–30% of tangible assets, with modest refinancing risks. We expect the bank to maintain a liquidity buffer of over 20% over the next 12–18 months.

The stable outlook on Bank Respublika's long-term deposit ratings reflects our expectation that the bank will maintain sound fundamentals over the next 12–18 months.

A material and sustained improvement in capital adequacy or further enhancement of the operating environment in Azerbaijan could lead to an upgrade of the bank's BCA and deposit ratings. Conversely, a significant deterioration in operating conditions that materially weakens asset quality, capital adequacy, or liquidity could result in a downgrade," Moody's added.