Baku. Vahab Rzayev – APA-Economics. Moody's Investors Service has 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.
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 low capitalisation which, together with its low pre-provision profit, leads to a weak loss absorption capacity; and 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 from the Ministry of Finance and AZN150 million subordinated loan from the Central Bank of Azerbaijan, International Bank of Azerbaijan's Tier 1 and Total Capital Ratios 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.
At the same time, it was noted that 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.
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.