BAKU, Azerbaijan, May 14
By Eldar Janashvili – Trend:
The Fitch Ratings international rating agency has affirmed the Long-Term Issuer Default Rating (IDR) of the International Bank of Azerbaijan (IBA) at B- with Stable Outlook, Trend reports with reference to the Fitch Ratings report.
“IBA's ratings are based on its intrinsic credit strength, as measured by its Viability Rating (VR) of B-. The VR continues to capture the risks stemming from the cyclical and oil-dependent operating environment, which we assess at B+/Negative,” the report said.
“These risks, are additionally aggravated by the ongoing economic downturn caused by the COVID-19 pandemic and the sharp drop in world oil prices. The IBA's VR is additionally pressured by the probability of the local currency depreciation risk, which will negatively affect the bank's capitalization,” the report noted.
Fitch experts also believe that some aspects of the IBA's credit profile are consistent with a higher rating (in particular, asset quality, franchise, financing and liquidity), but the unhedged open foreign exchange position of the IBA, limits the overall rating at “B-”.
Over the past two months, the IBA has reduced its open foreign exchange position by about $100 million, but this is still almost equal to the bank’s regulatory capital. In addition, the risks for IBA capitalization are reduced due to the large capital buffers of the bank, with regulatory Tier 1 and total capital ratios both equal to a high 33 percent at the end of 1Q2020, which is considered a high indicator.
"The IBA's capital buffer is sufficient to withstand the depreciation of the exchange rate to 2.5 AZN/USD and to continue to maintain capital ratios above the statutory minimums. The quality of IBA’s assets is also high, which is determined by the share of high-quality interbank placements and securities on the IBA balance sheet. Its profitability is also worthy, which is reflected in the high ratio of operating profit to risk-weighted assets," added the report.
Moreover, in connection with the outbreak of coronavirus and lower oil prices, the main source of depreciation risks is the IBA's net loan portfolio - 25 percent of total assets.
Fitch expects that the bank’s net profit will additionally be reduced in 2020 because of increased costs by the depreciation of loans. In addition, the unhedged open foreign exchange position of the IBA can lead to a large one-time hit on profitability in the event that the local currency depreciates.
“However, according to Fitch, the current economic downturn does not directly affect the financing and liquidity of the IBA. The bank’s reliance on sovereign customer deposits (51 percent of total liabilities) maintains a stable stock base. Although a moderate outflow of deposits is possible. Especially in the case of increasing devaluation pressure, we expect that the bank’s liquidity reserves will remain strong," the report said.
Factors that can individually or collectively lead to a downgrade are a combination of large foreign exchange losses, increased depreciation of loans and asset inflation, which will lead to a significant weakening of the bank’s position on capital.
“On the contrary, IBA’s ratings can be upgraded if the bank achieves a significant reduction in its open foreign exchange position relative to capital. In the long run, the potential for upgrades is associated with the gradual stabilization of the local operating environment," said the report.
Fitch Ratings noted that a positive outlook on the IBA’s support rating is unlikely in the near future, but greater clarity in relations between the bank and the state (Azerbaijan) may lead to a revision towards an increase in the lower support rating level.
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