Fitch Ratings has affirmed the ratings of  Azerbaijan's Accessbank and Pasha Bank at BB+ and BB-, respectively with a negative outlook, the ratings agency said on September 6. The agency, however, downgraded Accessbank's viability rating (VR) to 'b+' from 'bb-' on the back of a sharp decline in asset quality, while affirming Pasha Bank's VR at 'b+'.

One of the ten largest bank's in Azerbaijan's banking sector, which comprises 33 lenders, Accessbank is partly owned by international financial institutions (IFI) the European Bank for Reconstruction and Development (EBRD), Germany's KfW, the Black Sea Trade and Development Bank and the International Finance Corporation. The bank is the leading microfinance lender in the country, and an important lender to small and medium entreprises (SMEs). Fitch expects support from shareholders to remain high because of their historical commitment to microfinance in the region and the significant integration of IFI guidelines into Accessbank's risk management.

However, the lender's ability to receive and use support may be restricted by transfer and convertibility restrictions associated with the sovereign, Fitch notes. Earlier this month, Moody's said that Azerbaijan might reintroduce currency controls in order to fight an ongoing currency crisis prompted by low confidence in the manat and high demand for dollars.

Accessbank's half-year results, which saw the rate of non-performing loans (NPLs) in its portfolio surge from 5% at end-December to 20% at end-June, prompted the downgrade of its VR, Fitch elaborates. The sharp decline in asset quality is consistent with a similar trend in the entire sector, following a double devaluation of the manat in 2015 and corroborated by the high dollarisation of loans and deposits. Only 57% of Accessbank's NPLs were covered with impairment reserves at end-June, Fitch adds.

Accessbank's capitalisation remains high - the lender reported a Fitch Core Capital (FCC) ratio of 16%, although it will likely worsen as a result of impairments charges during the remainder of the year. Near-term refinancing needs levelled off in the first half of the year, but remains high. The bank's wholesale funding maturing within 12 months was equal to 30% of total liabilities, although the available liquidity buffer was equal to 92% of this amount.

Meanwhile, the country's third largest lender Pasha Bank will be protected by its systemic important - it belongs to a politically-connected consortium that also owns the country's second largest lender, Kapital Bank, and together account for 15% of the banking sector's assets. The somewhat improved track record of sovereign support for the banking sector after the country's largest bank, state-owned International Bank of Azerbaijan (IBA), was bailed out in 2015 is also a mitigating factor for Pasha Bank's rating. At end-2015, Pasha Bank held 41% of sector deposits.

The negative outlook on both banks, but particularly Pasha, reflects that of the sovereign, while the two-notch difference in rating reflects the latter's uneven sovereign support for the banking sector in recent years.

Meanwhile, Pasha Bank's VR reflects its solid capitalisation, ample liquidity and manageable asset quality deterioration, Fitch elaborates. Pasha Bank's FCC is double that of Accessbank's at 31%.

According to Pasha's 2015 financial results, NPLs stood at 9% at end-2015, while restructured loans stood at 6% and write-offs at 6% as well.

Azerbaijani bankers are fearful that rumours about a further depreciation of the currency, which was floated in February 2015, will result in massive losses for the banking sector and a further erosion of asset quality. Trust in the national currency is so low, that over 80% of savings are in dollars.

Analysts are suggesting the central bank would have no alternative but to allow the manat to depreciate if the siguation on the currency market does not improve. The regulator has refrained from doing so thus far because of a constitutional referendum due to be held on September 26.

Critics have accused President Ilham Aliyev of seeking to enhance his powers by looking to change the constitution, and to pave the way for his son Heydar to take over when he steps down. Pasha Bank belongs to Pasha Holding, a consortium believed to be controlled by the family first lady Mehriban Aliyeva.