Fitch affirms AFB Bank's rating at B with stable outlook

International rating agency Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of OJSC AFB Bank at "B" with a Stable Outlook.

According to Fitch cited by Report, the agency also affirmed the bank's Viability Rating (VR) at "b" and Government Support Rating (GSR) at "ns" ("no support").

According to Fitch, AFB Bank"s Long-Term IDR is determined by its standalone credit profile, reflected in its Viability Rating. The assessment takes into account the bank"s limited domestic market share, rapid balance-sheet growth putting pressure on capitalization and profitability, high business concentration, weak though improving loan portfolio quality, and adequate liquidity buffer.

As of the end of the first half of 2026, AFB Bank accounted for about 1% of the assets and deposits of Azerbaijan"s banking sector. Retail loans accounted for 39% of the total loan portfolio and consisted of mortgages and unsecured consumer loans. Corporate loans also accounted for 39%, while loans to small and medium-sized enterprises represented 22%.

The bank"s corporate business remains concentrated among a limited number of corporate groups, resulting in high concentration in its business model.

Fitch assesses AFB Bank"s lending standards as weak due to the continued high concentration of loans among individual large borrowers.

"According to our estimates, the 25 largest borrowers accounted for 39% of the total loan portfolio at the end of the first half of 2026. Most of the loans were extended to borrowers with whom the bank has maintained long-term relationships, while 48% of these exposures were secured by cash. In the first half of 2026, the loan portfolio grew by 35%, compared with 58% in 2025 and 2% in 2024. This growth is consistent with the bank"s expansion strategy and was driven primarily by retail lending and lending to small and medium-sized businesses," the agency said.

According to Fitch, the combined share of Stage 3 loans and purchased or originated credit-impaired financial assets fell from 14.4% at the end of 2024 to 7.3% at the end of 2025. This was supported by significant recoveries on legacy non-performing loans, moderate write-offs and rapid loan portfolio growth.

Stage 2 loans accounted for less than 2% of the total loan portfolio at the end of 2025. Coverage of Stage 3 loans by specific reserves reached 66%, which Fitch assessed as adequate.

Fitch expects the share of problem loans to decline to around 4% in 2026 and remain at that level in 2027, supported by further debt recoveries, the write-off of uncollectible loans and continued loan portfolio growth.

However, this forecast is subject to downside risks because a significant portion of the rapidly expanding loan portfolio has only a short repayment track record. As these loans mature, pressure on asset quality could increase.

AFB Bank"s operating profit-to-risk-weighted assets (RWA) ratio fell from 2.9% in 2024 to 0.9% in 2025. This was driven by an increase in operating expenses related to business expansion, which have not yet been fully offset by higher revenues.

As a result, the cost-to-income ratio increased from 70% in 2024 to 98% in 2025. Net profit was supported by reserve releases resulting from recoveries on legacy non-performing loans.

Fitch expects the bank"s profitability to remain under pressure in 2026 due to persistently high operating expenses, with economies of scale emerging only gradually. The agency forecasts moderate net profit, supported by further recoveries on legacy non-performing loans.

AFB Bank"s Fitch Core Capital (FCC) ratio declined from 36% at the end of 2024 to 23.3% at the end of 2025, but remained at a sufficiently high level. At the same time, the agency notes that the bank"s capital position should be assessed in the context of high risk concentration and its focus on rapid growth.

The Tier 1 capital adequacy ratio fell from 21.9% at the end of 2025 to 16% at the end of the first half of 2026, but also remained high.

Fitch forecasts a further reduction in the capital buffer as lending expands. The FCC ratio could decline to 13.5%-14% by the end of 2027, according to the agency, although this level would still be considered adequate.

In the first half of 2026, AFB Bank"s deposits increased by 56%, following a 72% increase in 2025. At the end of June, deposits accounted for 76% of the bank"s liabilities. Wholesale funding represented 14%, consisting primarily of low-cost, long-term funding from state development institutions. The liquidity buffer covered about 25% of customer deposits and was assessed by Fitch as adequate.

A sustained decline in the FCC ratio below 13% due to losses or rapid loan portfolio growth could lead to a downgrade of AFB Bank"s rating. A significant weakening of liquidity, particularly a substantial deposit outflow, could also have a negative impact.

Upside potential for the rating remains limited and depends on strengthening the bank"s market position, diversifying and stabilizing its business model, and improving its risk management framework.