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Fitch: Azerbaijan Banks Still Under Pressure from Weak Currency
March 16, 2017 / 8:37 AM / 8 months ago

Fitch: Azerbaijan Banks Still Under Pressure from Weak Currency

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Azerbaijani Banking Sector - Pressure from Currency Moves Persists here MOSCOW/LONDON, March 16 (Fitch) Currency devaluation continues to weigh on Azerbaijani banks and they face continued capital shortfalls due to weak asset quality, high dollarisation and currency mismatches, Fitch Ratings said at its sixth annual conference on Azerbaijan in Baku today. Fitch expects the banking sector to remain loss-making in 2017 and we have Negative Outlooks on most of the Azerbaijani banks we rate. Non-performing loans (NPLs; 90 days overdue) surged to 21% of gross loans at end-2016 (end-2015: 12%) and we expect banks' high exposure to foreign-currency loans (48% of total loans at end-2016) to create more pressure in 2017. The sector also has sizeable exposure to project finance, where loan quality is largely untested, due to the long tenors of loans and grace periods on principal. Banks will not be able to absorb new NPLs through growth, given the sluggish economy and capital constraints. We forecast a 5% loan contraction in 2017. We expect more bank failures and sector clean-up measures in 2017, primarily due to material capital shortfalls driven by poor asset quality and foreign-exchange risks. Five out of eight banks rated by Fitch at the start of 2016 have failed since then, including the country's largest bank, International Bank of Azerbaijan (IBA, BB/Negative/f), and the central bank revoked the licences of 10 smaller unrated banks. IBA's Long-Term IDR of 'BB' is driven by the likelihood of government support, reflecting state-ownership, high systemic importance and the recent record of assistance. Additional support to IBA may come as the bank negotiates with the authorities a new capital injection following a AZN600 million injection in January, and a further AZN5 billion asset transfer, potentially in exchange for foreign currency. The support package may also include the material reduction of IBA's substantial short open foreign-currency balance-sheet position, by converting its state-related liabilities into local currency, or through hedging. However, IBA's margins and pre-impairment profit are likely to stay negative for the near term and its growth strategy is unclear. Privately owned banks typically do not receive government support, although many benefit from regulatory forbearance. The banking sector made a substantial net loss of AZN1.7 billion in 2016, although about AZN1.3 billion of this relates to losses at IBA, mainly driven by one-off currency translation losses. Net of IBA, the sector lost about 10% of its opening equity in 2016. Uncollected accrued interest is a significant drag on some banks' revenue. Funding profiles stabilised in the second half of 2016, after the sector lost about 10% of customer funding early in the year. Foreign borrowings (of which more than half is at IBA) decreased in 2015-2016 and remain moderate relative to sovereign foreign-currency reserves. IBA's refinancing risks will depend on receipt of waivers and the bank's ability to exchange local currency into foreign currency, as the central bank provides only limited foreign currency to banks to limit pressure on the exchange rate. Apart from IBA, the sector's overall currency position is closed out, although some small banks may have large mismatches. The presentation "Azerbaijani Banking Sector - Pressure from Currency Moves Persists" is available at or by clicking the link above. Contact: Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 Alexander Danilov Senior Director +7 495 956 2408 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email:; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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