Details added (first version posted on 10:57)
Baku, Azerbaijan, Dec.25
By Azad Hasanli - Trend:
The Central Bank of Azerbaijan is planning to lower the minimum capital ratio requirement to 10 percent by end-2015 from 12 percent currently, Fitch Ratings said Dec.25.
"A sharp decline in the Azerbaijani manat hit local banks' capital ratios via inflation of foreign currency-denominated risk-weighted assets (RWAs), and in some cases, significant translation losses on unhedged short open currency positions (OCP)," said the message.
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 devaluation of the manat in February 2015, said Fitch Ratings.
Additional longer-term downside stems from potential asset quality pressure due to significant dollarization of the loan books (sector average was around 60 percent after the devaluation), while most of the borrowers have limited access to revenues in foreign currency, according to the message.
Fitch Ratings said that 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.
Currently, 43 banks operate in Azerbaijan.