Moody's names factors for GDP growth and facilitation of banks' work in Azerbaijan

Moody's Investors Service (Moody's) took rating actions on five Azerbaijani banks, namely, International Bank of Azerbaijan (IBA), Kapital Bank OJSC, Xalq Bank OJSC, Bank Respublika JSC, and Bank of Baku OJSC, Report informs, citing the rating agency.

These follow the upward revision of the Azerbaijani banking system's Macro Profile to "Weak-" from "Very Weak+" given the improving operating conditions in the country.

Specifically, Moody's has upgraded to b2 from b3 the Baseline Credit Assessment (BCA) and Adjusted BCA of IBA, affirmed the BCA and Adjusted BCA of Kapital Bank at b1, affirmed the BCA and Adjusted BCA of Xalq Bank, Bank Respublika, and Bank of Baku at b3.

Also, Moody's affirmed the long-term local and foreign currency deposit ratings of IBA at B1, Kapital Bank at Ba3, Xalq Bank at B2, Bank Respublika, and Bank of Baku at B3.

The agency changed the outlooks on the long-term local and foreign currency deposit ratings of IBA and Bank of Baku to positive from stable; the outlooks on the long-term local and foreign currency deposit ratings of Kapital Bank, Xalq Bank, and Bank Respublika were changed to positive from negative.

The long-term local and foreign currency Counterparty Risk Ratings (CRRs) and the long-term Counterparty Risk Assessments (CR Assessments) of all five banks are affirmed.

“The rating actions take into account Moody's decision to change the Azerbaijani banking system's Macro Profile to "Weak-" from "Very Weak+" to reflect the improvements in the operating environment for Azeri banks, which will gradually translate into the improvement of the banks' standalone credit profiles, in particular, asset quality and profitability assessments. The gradual lifting of pandemic restrictions and recovering global oil prices will underpin GDP growth and ease operating conditions for banks and their borrowers in the next 12-18 months. These exert upward pressure on Azerbaijani banks' credit profiles. The positive outlooks of the aforementioned long-term ratings of all Azerbaijani banks (except for IBA) reflect the resulting upward pressure on these banks' intrinsic financial strength (or BCAs),” reads Moody’s report.

Government support measures for borrowers, which equaled 4.6% of GDP in 2020, along with loan restructuring provided by banks have mitigated the adverse impact of the pandemic and lockdowns on borrowers. The government was able to support the economy through cash handouts to low-income families, unemployment benefits, the temporary creation of public jobs, wage and tuition subsidies, and discounts on utility bills in 2020.

“The stability of the manat despite highly volatile oil prices in 2020 has supported the quality of foreign-currency-denominated loans, which accounted for 30% of total loans at the end of 2020. Moody's expects real GDP growth at 3.5% in 2021 underpinned by the relaxation of coronavirus-related restrictions on activity and movement as well as higher oil and gas production. Over the next 2-3 years, Moody's estimates economic growth to average around 3%.”

Moody's rating methodology for banks includes an assessment of each individual country's operating environment, expressed as a Macro Profile, which is designed to capture system-wide factors that are predictive of the propensity of banks to fail. The Macro Profile assigned to each bank informs the financial factors, which are key inputs into the determination of each bank's BCA.