Moody's downgrades International Bank of Azerbaijan's deposit ratings to Ba3; negative outlook
November 30, 2012 Moody's Investors Service
London, 29 November 2012 -- Moody's Investors Service has today downgraded
the following global scale ratings of International Bank of Azerbaijan:
long-term local currency deposit rating to Ba3 from Ba1, long-term
foreign currency deposit rating to Ba3 from Ba2, long-term foreign
currency senior unsecured debt rating to Ba3 from Ba1, and long-term
foreign currency subordinated debt rating to B1 from Ba2. Concurrently,
Moody's affirmed the bank's standalone bank financial strength rating
(BFSR) of E+, which is equivalent to a standalone credit assessment of
b3. The outlook on long-term ratings and the BFSR is negative.
Moody's rating action is largely based on International Bank of
Azerbaijan's audited financial statements for 2011 and the first six
month of 2012, prepared under IFRS.
The downgrade of International Bank of Azerbaijan's supported ratings to
Ba3 is driven by Moody's assessment of a reduced probability of systemic
support for the bank to "high" from "very high". According to the rating
agency, the track record of support from the government to International
Bank of Azerbaijan -- which is the largest bank in the country and is
currently 50.2% owned by the government -- has thus far fallen short of
providing appropriate and timely support to strengthen the bank's capital
base, which materially eroded in 2010. The recent capital injections
from the government and the Central Bank of Azerbaijan were significantly
delayed and only marginally improved the bank's capital levels (as
discussed below). In addition, given the Azerbaijan government's plan to
privatise the bank in the medium to long term, Moody's considers that the
likelihood of systemic support for the bank has decreased, in favour of
support from private shareholders.
Moody's says that International Bank of Azerbaijan still benefits from a
high probability of systemic support, based on its 50.2% government
ownership, large market shares and systemic importance for Azerbaijan's
economy. As a result, in accordance with Moody's Join Default Analysis
(JDA) methodology for banks, International Bank of Azerbaijan's deposit
ratings of Ba3 benefit from a three-notch uplift from its b3 standalone
The negative outlook on International Bank of Azerbaijan's supported
ratings is driven by the negative outlook on the bank's standalone BFSR
-- which reflects the negative pressure on the bank's financial
fundamentals due to (1) low capitalisation which, together with its low
pre-provision profit, leads to a weak loss absorption capacity; and (2)
weak asset quality which could potentially result in higher loan loss
reserves, thus exerting further pressure on the bank's capital.
As a result of recent capital injections in Q1 2012 comprising AZN50
million (Tier 1 capital) from the Ministry of Finance and AZN150 million
(Tier 2 capital) subordinated loan from the Central Bank of Azerbaijan,
International Bank of Azerbaijan's Tier 1 and Total Capital Ratios
(under Basel I) improved to 6.03% and 10.78%, respectively, as at 30
June 2012, from 4.95% and 7.6% at year-end 2011. According to local
GAAP, International Bank of Azerbaijan reported a regulatory capital
adequacy ratio (CAR) of 10.06% at end-September 2012, which is below the
regulatory minimum of 12%; Moody's notes that the bank benefits from
regulatory forbearance from the Central Bank of Azerbaijan.
In 2011 the bank was in breached of covenants on capital that related to
funding operations carried out in the capital markets and returned to
compliance in H12012 as reported in the audited IFRS as at 30 June 2012.
Moody's believes that International Bank of Azerbaijan may breach these
capital covenants again, as the rating agency views the recent capital
increases (including an additional AZN50 million from International Bank
of Azerbaijan's private shareholders which the bank expects to be
allocated by Q1 2013) as insufficient in light of the current high level
of problem loans, the 20% lending growth expected by the bank in 2012 and
its weak internal capital generation capacity.
The rating agency notes that International Bank of Azerbaijan has a weak
asset quality. Loans overdue by more than 90 days increased in absolute
terms and accounted for 12% of gross loans outstanding; moreover, the
level of loans overdue less than 90 days and renegotiated loans increased
to 17% and 18% of gross loans outstanding, respectively, at year-end 2011
(2010: 15% and 13%, respectively). As some of those loans will likely
become non-performing in 2012 and 2013, Moody's expects International
Bank of Azerbaijan will have to increase provisions going forward given
the currently low provisioning coverage. During H1 2012, International
Bank of Azerbaijan did not increase loan loss reserves, which accounted
for 13.2% of gross loans as of 30 June 2012 and, in Moody's view, the
bank's loan portfolio remains under-provisioned.
For the first six month of 2012, International Bank of Azerbaijan
reported net profit of AZN23 million, up from AZN6.3 million reported in
H1 2011, which translated into a weak return on average assets (RoAA) of
0.9% (annualised), up from 0.4% in 2011. Moody's notes that modest
improvement of the bank's financial results was due to lower loan loss
provisions, while its pre-provision profitability has been decreasing
since 2008 due to shrinking interest margin (1.9% at mid-2012). The
rating agency believes that International Bank of Azerbaijan's
bottom-line results will likely be pressured by higher loan loss
provisions in the next 12-18 months.
WHAT COULD MOVE THE RATINGS UP/DOWN
Considering the negative outlook on International Bank of Azerbaijan's
long-term ratings, any upgrades are unlikely in the medium term;
however, the outlook could be changed to stable from negative if the bank
would benefit from a material capital injection that would be considered
by Moody's as sufficient to offset asset quality pressure.
At the same time, Moody's notes that negative pressure could be exerted
on International Bank of Azerbaijan's ratings due to any material adverse
changes in the bank's risk profile, particularly significant weakening of
the bank's capitalisation, asset quality and liquidity position.
The principal methodology used in this rating was Moody's Consolidated
Global Bank Rating Methodology published in June 2012 . Please see the
Credit Policy page on www.moodys.com for a copy of this methodology.
Headquartered in Baku, Azerbaijan, International Bank of Azerbaijan
reported consolidated total assets of AZN5.46 billion and total equity
of AZN 350.5 million under audited IFRS as H1 2012.
Company — International Bank of Azerbaijan
Full nameThe Open Joint Stock Company "International Bank of Azerbaijan"