Moody's notes two-fold decrease in problem loans of Azerbaijan's Xalq Bank

Moody's Investors Service (Moody's) upgraded the Baseline Credit Assessment (BCAs) of Azerbaijan's Xalq Bank to b2 from b3, and the long-term deposit ratings to B1 from B2, Report informs, citing the agency.

These rating actions reflect the rating agency's view that the operating environment for Azerbaijani banks will improve in the next 12-18 months, as reflected by the upgrade of Azerbaijan's sovereign rating.

"The upgrade of the bank's BCA and Adjusted BCA to b2 from b3 reflects its improved asset quality as well as its solid capital adequacy level," reads the agency's report.

The upgrade of the local and foreign currency long-term bank deposit ratings to B1 reflects both the improved creditworthiness of the bank and Moody's assumption of a moderate support to the bank from the government of Azerbaijan, resulting in one notch of the support uplift from the bank's BCA of b2.

"Xalq Bank's ratio of problem loans to gross loans fell to 5.8% at year-end 2021 from 12.8% as of 2020, a combination of the government support programme, the waning impact of the coronavirus pandemic and an improving operating environment.

The bank's TCE/RWAs (tangible common equity/ risk-weighted assets) ratio was 21% as of end of 2021, and this solid capitalisation is supported by its high ratio of shareholders equity to total assets which was 19%. This provides the bank with a good buffer to absorb any unexpected loan losses. However, Xalq Bank's profitability, with a net income ratio of 1.2% as of end of 2021, is restrained by its relatively lower net interest margins (3.3% at year-end 2021) and a relatively high cost-to-income ratio (65% in 2021)," says Moody's.