Azernews.Az

BAKU – The rating agency Moody’s Investors Service has increased from negative to stable the outlook for Azerbaijan’s banking system.

The measure reflects the recent stabilization in the banks’ asset quality and liquidity and improving profitability and capitalization, Moody’s said in its new report "Banking System Outlook on Azerbaijan".

The banks are also benefiting from the relatively stable macroeconomic environment within Azerbaijan, while low banking penetration offers opportunities for long-term growth, it said.

The outlook expresses Moody’s expectations for the fundamental credit conditions in Azerbaijan’s banking system over the next 12 to 18 months.

Moody’s also said that while the key outlook drivers have stabilized, the improvement has occurred at a very weak level and big challenges still remain. This is reflected in the low average Bank Financial Strength Rating (BFSR) of E+.

"Azerbaijan’s oil-based economy remains sensitive to external shocks, and the banks’ credit-risk appetite remains high, evidenced through significant lending concentrations, related-party exposures, and a high share of FX loans. Additionally, the risk-management and underwriting standards of Azerbaijani banks remain sub-par," says Lev Dorf, Moody’s leading analyst for Azerbaijani banks and the author of report.

Moody’s believes that the level of problem loans (loans 90+ days overdue, and restructured loans) has now peaked at 15%-17% of gross loans, in mid-2010. Problem loans are likely to remain stable at this level until the end of 2010.

"Since the banks have already covered most of the anticipated loan losses, Moody’s does not expect loss provisions to constrain the banks’ profitability during the outlook horizon. We expect the banks’ profitability to improve due to credit growth acceleration and an increasing proportion of higher-yielding assets on bank balance sheets. We do not expect pressure on banks’ capital levels this year and in 2011," Dorf explains.

According to the Central Bank of Azerbaijan (CBA), the total system’s current capital adequacy ratio (CAR) was 17% at year-end 2009, compared with the regulatory minimum CAR of 12%. Capital levels improved in 2009 for all Azerbaijani banks rated by Moody’s.

"This partly mirrors the slowdown of loan growth in 2009, and since any additional required loss coverage is likely to be small, this will not negatively affect capitalization this year," Dorf added.

While liquidity has stabilized, the banks remain dependent on central bank funding, although the rating agency does not expect the banks to face any near-to-medium-term liquidity pressures or refinancing problems given their relatively liquid balance sheets.

The increase in liquid assets is mainly due to weaker loan growth and liquidity support measures implemented by the CBA. The banks’ liquidity positions have also benefited from an increased steady inflow of deposits after a period of deposit outflows in early 2009, the report said.