Fitch: Azerbaijan banks - limited capacity to absorb losses

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.

However, most Fitch-rated Azerbaijan banks appear to have sufficient capital to withstand the direct impact of even an extreme additional 40% manat depreciation.

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.

 

(Fitch Ratings)