Moody's downgraded the Baseline Credit Assessments (BCAs) and downgraded the long-term deposit ratings of VTB Bank (Azerbaijan), OJSC Bank of Baku and UniBank Commercial Bank with a negative outlook. 

Moody's also changed the outlook to negative from stable on the long-term deposit ratings of OJSC XALQ BANK, Joint Stock

Commercal Bank Respublika and Kapital Bank OJSC, while the banks' ratings were affirmed. 

The long-term deposit and senior unsecured debt rating of International Bank of Azerbaijan at Ba3 with a stable outlook and BCA at b3 were unaffected.

The rating actions reflect the negative impact of the depreciation of the Azerbaijani manat on the banks' asset quality, profitability and funding after the introduction in December 2015 of a free-floating exchange rate regime, as well as heightened dollarization of the banks' funding profiles, Moody's said.

This rating action has led Moody's to lower the macro profile of Azerbaijan (Baa3 stable) to "Weak-" from "Weak" reflecting a very high degree of dollarization relative to other countries in the CIS region and the resulting increased fragility in funding. 

"We expect these events to have a sustained impact on the Azerbaijani banks given: (i)their high exposure to foreign currency-denominated lending; (ii) Moody's expectation of further asset quality deterioration amid sharply fallen oil prices, resulting in worsening operating environment; and (iii) declining capital buffers to absorb mounting credit losses," the agency said.