Moody’s downgrades Bank Standard Azerbaijan; negative outlook

Moody's Investors Service has downgraded the long-term foreign and local currency deposit ratings of Azerbaijan's second-largest bank, Bank Standard, to B3 from B1 and the bank financial strength rating (BFSR) to E from E+. The outlook for the long-term deposit ratings is negative.
The downgrade of Standard's ratings has been prompted by the material deterioration in its risk profile, as reflected in a significant decline in its asset quality, increasing market risk and stand-alone liquidity risks as well as Moody's growing concerns that the bank is likely to continue to require external support from the Central Bank of Azerbaijan (CBA).
Moody's noted that the bank's reported level of problem loans (overdue for more than 90 days) reached 25% in Q1 2009. In addition, the bank's recently revealed high balance-sheet exposure to market risk led to sizeable trading losses as a result of the sharp decline on the Russian securities market in H2 2008. The bank's combined exposure to Russian equity and fixed-income instruments was around 16% of total assets or 100% of its Tier 1 capital.
The magnitude of the downgrade reflects Moody's expectation of significant erosion of Standard's capital base given the high level of anticipated credit and trading losses in relation to its equity. Moody's also cited the bank's insufficient level of loan loss reserves, which provided a low 29% coverage of problem loans at the end of May 2008, as an additional factor in the downgrade. The rating action also reflects Moody's concerns about the bank's liquidity profile in the medium term given Standard's highly volatile deposit base. Liquidity could become stressed given the bank's level of capitalisation.
Moody's noted that Standard's liquidity position is being supported by the CBA which has recently provided a short-term loan of AZN50 mln (US$62.3 mln), and the bank is likely to receive an additional tranche to repay its external borrowings. The rating agency is of the opinion that economic capitalisation and liquidity are currently the key determinants in assessing Standard's financial strength. Thus, the above-mentioned concerns, together with the uncertainty surrounding Standard's capitalisation, have prompted the downgrade of Standard's BFSR to E from E+.
The negative outlook on Standard's long-term deposit ratings reflects Moody's expectation that the difficult operating environment will exert negative pressure on the bank's financial fundamentals and that the bank will likely require support from its regulator — in the form of liquidity and capital — to avoid insolvency and maintain franchise viability in the near-to-medium term.