The agency believes 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.
Loss absorption capacity at most Azerbaijan banks is limited, considering the significant risks they face, says Fitch Ratings.
The growth of Azerbaijan`s economy, heavily dependent on oil exports, may fall to only 1.5% in 2015. 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, the report says.
The authors of the report 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.
Fitch Ratings rates 13 organizations in Azerbaijan, including the Azerbaijan Mortgage Fund, nine commercial banks and state-owned companies.
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