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Moodyâ€™s Agency sees Azerbaijan highly dollarised

17 November 2008 12:13 (UTC +04:00)

Azerbaijanâ€™s banking system has been benefiting from strong economic growth in recent years but the operating environment remains challenging, says Significant developments on the regulatory and supervisory front have been achieved but the framework is still largely untested and immature.
"Robust macroeconomic conditions in Azerbaijan over recent years, combined with the governmentâ€™s efforts to diversify and expand the non-oil segment of the economy, have contributed to the franchise development of the countryâ€™s banks. Nonetheless, the operating environment in Azerbaijan remains challenging and highly dependent on oil price movements and the performance of a few economic sectors," says LevDorf, a Moodyâ€™s Associate Analyst and author of the report. The Azerbaijani banking system is highly concentrated at the top, with the six largest banks controlling around 70% of the systemâ€™s total assets, but remains relatively fragmented at the bottom, with another 40 banks accounting for the remaining market share. Government-owned banks have historically dominated the sector and concentration of stateownership is still high: although privatisations have left the country with just one government-owned bank, this is the dominant bank in the system. Foreign presence in the system is still modest but is likely to increase over time as interest from foreign banks wishing to purchase stakes in local banks is growing on the back of macroeconomic stability and theopportunities offered by Azerbaijani markets. Moodyâ€™s views Azerbaijan as a highly dollarised country, which is characterised by a high percentage of dollar-based assets and deposits. As a result, Azerbaijan does not have a central bank that can issue USdollar currency, which effectively leaves the country without a lender of last resort and therefore banksâ€™ deposit ratings enjoy limited uplift to reflect systemic support expectations. In Moodyâ€™s opinion, the Azerbaijani authorities may, under certain conditions, decide to provide systemic support to certain banks in distress. This view takes into consideration regulatory practice within the countryâ€™s banking sector and the history of its development over the past 20 years. "The regulatory and supervisory framework is evolving and, in our view, is still immature and needs to be tested further. We view positively the continuous steps taken by the National Bank of Azerbaijan to enhance its supervisory techniques and oversight and welcome its plan to adopt risk-based supervision," Mr Dorf says.
Moodyâ€™s new Banking System Profile for Azerbaijan forms part of a new series of reports on banking systems throughout the world, which are designed to complement the rating agencyâ€™s Banking System Outlook reports by serving as descriptive reference guides to key structural factors that are reflected in Moodyâ€™s bank credit ratings.