Fitch keeps IBA on RWP; Takes negative action on 4 other banks

The rating actions on five Azerbaijani banks are driven by the Azerbaijani authorities' decision on 21 December 2015 to abandon the currency peg and move to a floating-rate regime. A sharp decline in the Azerbaijani manat hit local banks' capital ratios via (i) inflation of foreign currency-denominated risk-weighted assets (RWAs), and (ii) in some cases, significant translation losses on unhedged short open currency positions (OCP). 

Some banks face the risk of breaching capital ratios, although Fitch believes that some regulatory forbearance is likely to be provided, giving the shareholders time to inject capital and to bring the banks in compliance with regulatory capital adequacy rules. This view is based on a track record of regulatory forbearance being made available to the banking sector after a previous 34% devaluation of the manat in February 2015. In addition, the regulator is planning to lower the minimum capital ratio requirement to 10% by end-2015 from 12% currently, which will help the banks to achieve compliance.

Additional longer-term downside stems from potential asset quality pressure due to significant dollarisation of the loan books (sector average was around 60% after the devaluation), while most of the borrowers have limited access to revenues in foreign currency.

Liquidity may also be challenged if people start withdrawing money, although according to banks deposits were stable in the last several days. In the worst case scenario, Fitch believes that support from the Central Bank may be forthcoming.