Moody’s downgrades International Bank of Azerbaijan

Moody's Investors Service has downgraded the long-term and short-term local currency deposit ratings f International Bank of Azerbaijan to Baa3/Prime-3 from Baa2/Prime-2, and the long-term foreign currency subordinated debt rating to Ba1 from Baa3. The outlook on these ratings is now negative.
In addition, Moody's has changed the outlook on the Ba2 long-term foreign currency deposit rating of IBA to stable from positive following the recent change in outlook on Azerbaijan's Ba2 foreign currency deposit ceiling to stable from positive.
Amid the recent crisis, the Azerbaijani government has been supportive by providing short-term liquidity to a number of banks facing repayments of foreign debt. At the same time, the credit stress in the banking system has increased significantly, with non-performing and restructured loans reaching double-digit levels. The total foreign borrowings of Azerbaijani banks amount to a manageable level of around US$2 bln, with half to be repaid this year; the bulk of this amount is due from IBA as the largest bank in the system.
According to Moody's, IBA remains the largest and the only state-controlled bank in the country. It enjoys a strategic role and government commitment since it has historically been instrumental in implementing state investment and economic policies, acting as an agent of the government in financing large-scale projects of national importance to Azerbaijan.
The negative outlook on IBA's local currency deposit rating and foreign currency subordinated debt rating reflects Moody's concerns that the weakening operating environment in Azerbaijan, coupled with the funding constraints are likely to adversely affect IBA's asset quality, liquidity and, ultimately, capitalisation going forward.
Moody's is anticipating potential credit problems within the corporate segment as it accounts for the largest portion of IBA's loan book (86%). The bank's credit exposure to the construction and aluminium sector — which has been particularly affected by the crisis — exceeds 200% of its Tier 1 capital. Also, the high level of borrower concentration adds volatility to the bank's asset quality indicators, as the default of only one large borrower would inevitably result in material deterioration of the portfolio's quality.
Headquartered in Baku, International Bank of Azerbaijan reported total assets of AZN3.8 bln (US$4.8 bln) and shareholders' equity of AZN384.4 mln (US$479.9 mln) under IFRS at year-end 2008.