Fitch: Azerbaijan banks appear to have sufficient capital to withstand additional 40% manat depreciation

Baku. 9 September. REPORT.AZ/ "Fitch Ratings" International Rating Agency states that Azerbaijan banks appear to have sufficient capital to withstand the direct impact of even an extreme additional 40% manat depreciation.

Loss absorption capacity at most Azerbaijan banks is limited, considering the significant risks they face, says Fitch Ratings. 

Report informs referring to the agency, the growth of Azerbaijan's economy, heavily dependent on oil exports, may fall to only 1.5% in 2015, resulting in weaker asset quality. Further pressure on the currency, the manat, which suffered a 34% devaluation against the US dollar in February 2015, although not our central scenario, is a risk. However, on the positive side, aggregate deposit levels have been stable to date and refinancing risks on wholesale funding are low. The strong sovereign balance sheet means the authorities can provide targeted liquidity and capital support to banks, and the Azerbaijan central bank has shown regulatory forbearance. We believe capital positions at some banks are likely to come under significant pressure over the medium term from increasing credit losses. Capital cushions are only moderate in most cases, and internal capital generation is limited.

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According to the agency, International Bank of Azerbaijan (IBA, BB/RWP), which represents 35% of sector assets, reported a 12% capital ratio at end-June 2015, hitting the regulatory minimum. This should improve once a capital injection, planned for 4Q15, is received and the sale of impaired loans is completed. We expect zero loan growth for the banking sector in 2015 (net of exchange-rate effects and IBA's loan sales) and credit demand is also likely to be weak in 2016. Asset quality, already somewhat strained, with impaired loans averaging 10% at end-1H15 at Fitch-rated banks, is likely to deteriorate further. Additional impairment is most likely to arise within foreign currency (FC) denominated loan books, which represented 43% of total sector lending at 1H15. This is because the most of the borrowers do not have access to FC revenues. Currency mismatches are rising as customers convert local-currency deposits into US dollars. FC-denominated deposits represented 67% of total sector deposits at end-June 2015 and the banks run sizeable short FC positions, averaging 30% of regulatory capital. To ease potential liquidity strains in local currency, the central bank has, since early 2015, assisted the banks by buying US dollars in exchange for manat. Some banks are in breach of regulatory open position currency requirements but have received waivers from the central bank. A presentation on Azerbaijani banks, delivered at Fitch's annual conference in Baku, Azerbaijan, is available by clicking on the link below.