Baku, January 22, AZERTAC

Moody's Investors Service has today taken rating actions on six Azerbaijani banks.

The downgrade of OJSC Bank of Baku's BCA to b3 from b1 and downgrade of the long-term deposit ratings to B3 from B1 with a negative outlook reflects Moody's expectation that currency depreciation will lead to a worsening of the bank's asset quality and profitability, while loss-absorption buffers will remain modest in the next 12-18 months.

OJSC Bank of Baku's asset quality weakened in H1 2015, following the seasoning of the retail portfolio after the rapid growth of previous years. This led to an increase in the bank's credit costs to 14.9% of average gross loans in H1 2015, up from 6.0% in 2014 and 1.7% in 2013. The currency depreciation in December 2015 will also affect asset quality, as most of the bank's foreign currency loans (representing 27% of the total portfolio as of December 1, 2015) are to unhedged borrowers. In addition, accelerated consumer price inflation, along with a potential increase in unemployment, will affect individuals' real disposable income and, as a result, their capacity to service debt.

Moody's believes that the bank's loss-absorption capacity will be modest during the next 12-18 months due to (i) elevated provisioning charges; and (ii) a foreign currency revaluation loss of about AZN14.5 million, recognized in December 2015 according to management data. The rating agency believes that historically robust provisions coverage of over 100% of restructured and past due over 90 days loans in 2014 and H1 2015, along with healthy pre-provisioning profitability (PPI/average assets of 12.7% in H1 2015) and expected deleveraging will somewhat offset adverse pressure on the bank's loss-absorption cushion.