Fitch Ratings on Negative Perspective of Banking System of Azerbaijan

Private banks have attracted a large number of loans in foreign currency and are subject to losses on short currency positions, the press release from the international agency Fitch Ratings says.

In other words, the devaluation of the manat will adversely affect the capitalization of the banking sector and strengthen the dollarization of the economy and bank balance sheets, which means that the currency risk in the sector will be essential not only in the short term, but also in the medium term. There is an argument that by December 31, the local banking system had a fairly short currency balance sheet position of $ 1.7 billion, or 43% of the total equity of the system.

In addition, several banks have suffered significant losses as a result of the devaluation. "According to our estimates, some banks probably violated regulatory capital adequacy requirements. However, we believe that the regulator may permit a derogation from the requirements to help banks formally implement them, as it was, for example, in Russia," the press release from the agency says.

According to Fitch, foreign currency loans by the end of last year accounted for 27% of all loans in the sector (after the devaluation - about 33%). "According to our estimates, the devaluation should increase assets, risk-weighted approximately 9% for the banking system as a whole. This will lead to a reduction of about 2 percentage points less than the overall adequacy of regulatory capital in the sector, which is the end of 2014 was at a high level - 19%. At the same time, this effect is likely to vary from bank to bank. Banks with higher than average share of foreign currency loans may experience greater pressure on capital," the text says, and emphasizes that the gradual deterioration in the quality of assets on foreign currency loans is likely, especially since the majority of borrowers of such loans have limited access to foreign exchange earnings.

"Devaluation is broadly a neutral point for the sovereign credit profile. It will contribute to fiscal and external adjustments that is positive amid falling oil prices. The sharp appreciation of the real effective exchange rate of the manat as a result of a decline of the Russian ruble and the Turkish lira in 2014-2015, if continued, would have a negative impact on measures to promote non-oil economy in Azerbaijan.

At the same time, this unexpected move will affect the credibility of the authorities in the country. In addition, it carries a risk of contingent liabilities, especially in the banking sector, although the very strong state balance of Azerbaijan provides a significant margin of safety. The assets of the State Oil Fund (SOFAZ) is $ 37.1 billion. That is equivalent to 49% of GDP at the end of 2014," the press release says. --17D-