Moody’s reveals reasons for Xalq Bank’s vulnerable asset quality

Moody’s upgraded Xalq Bank's BCA to b1 from b2 and upgraded to Ba3 from B1 the bank's long-term bank deposit ratings, Report informs.

Moody’s also changed to stable from positive the outlook on the Ba3 long-term deposit ratings.

The upgrade of the bank's BCA to b1 from b2 was driven by a combination of the improvement in Azerbaijan's banking system Macro Profile to “Weak” from “Weak-“, lower downside risks in the current operating environment as well as the bank's strengthened funding profile. The upgrade of the local and foreign currency long-term bank deposit ratings to Ba3 from B1 follows its BCA upgrade.

“Xalq Bank's b1 BCA reflects solid pre-provision revenue generation, a strong capital position with TCE/RWA ratio of 16.1% and a strengthened funding profile with a stable deposit base, decreased reliance on market funds, to 9% of total assets and a sound liquidity buffer of 24% of total assets at the end of 2023. These strengths are moderated by vulnerable asset quality because of a large proportion of foreign-currency-denominated loans (43% of gross loans) and substantial single-name credit concentration with the 17 largest borrowers accounting for 46% of gross loans or 178% of the bank's tangible common equity (TCE) at the end of 2023,” Moody’s said.

“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 support from the Government of Azerbaijan in case of need, based on the bank's status as the fourth-largest bank in the country with large market shares in both loans and customer deposits. This support translates into one-notch rating uplift to the bank's long-term deposit ratings from its b1 BCA,” the company added.

The outlook on Xalq Bank's long-term deposit ratings is stable, reflecting our view that the bank will maintain its sound fundamentals over the next 12-18 months.