Azerbaijani banks remain constrained by weaknesses and risks

As part of its global framework for estimating banks' credit losses and their effect on ratings, Moody's Investors Service has revised its stress-test assumptions for banks in Azerbaijan under its anticipated — or base-case — scenario.
Moody's uses stress testing to understand the sensitivity of banks' capital positions to a range of credit loss estimates.
Moody's notes, however, that the change in the stress-test assumptions will not trigger any positive rating actions, as Azerbaijani bank ratings will remain constrained by a number of factors, including their weak funding profiles and stand-alone liquidity, corporate governance-related deficiencies and weak risk management, low economic capitalisation and high concentration risks.
Azerbaijan's oil-based economy has proved resilient to the global slowdown. The local currency — the Azeri manat — has been stable since the beginning of the global financial crisis and Moody's sees a low risk of currency depreciation in the medium term.
"Key factors supporting our view, and the government's effort to maintain a stable currency, include adequate levels of international reserves, relatively low levels of external debt, and rising FX revenues from oil and gas exports on the back of recovering prices," said Lev Dorf, lead analyst at Moody's for Azerbaijani financial institutions.
Given the stability of the Azeri manat and the improving economic conditions in H2 2009, Moody's has revised its stress-test assumptions under its base-case scenario to reflect the lower-than-expected risk in the foreign-currency loan books of Azerbaijan's banks. Moody's believes there is now no need to differentiate between local and foreign currency loans in terms of their probability of default (PD) and loss given default (LGD). It has therefore revised its PD and LGD estimates for foreign currency loans to the same levels as those for the local currency loans. This results in a higher expected combined capital adequacy ratio under the new base-case assumptions. Moody's assumptions for the worse-than-expected (stressed) scenario remain unchanged.