Moody's: Azerbaijan's banking system remains stable
By Nigar Orujova
The outlook on Azerbaijan's banking system remains stable, Moody's Investors Service said in a new report Banking System Outlook: Azerbaijan, published in London on July 16.
The key drivers of the outlook include a favorable operating environment, improving asset quality, sufficient capital buffers to absorb losses.
According to the report, the credit-positive factors will remain counterbalanced by the banking system's structural weaknesses, related to the lack of diversification in Azerbaijan's economy, banks' limited access to long-term funding, low transparency and corporate-governance deficiencies, and high exposure to single borrowers and related parties.
"Supportive macroeconomic conditions will remain a key factor that underpins our stable outlook for the banking sector over the 12-18 month outlook period. According to our forecasts, Azerbaijan's GDP will increase by 3.5 percent in real terms in 2013 (2012: 2.2 percent), driven by a continued strong performance in the non-oil economy which benefits from government-led investments in large-scale infrastructure projects," says Lev Dorf, a Moody's Analyst and the report's author.
According to him, the strong growth in Azerbaijan's non-oil sectors will, in turn, boost banks' asset quality, leading to a fall in the level of problem loans (overdue by more than 90 days, and restructured) to around 11 percent of gross loans during the outlook period, from 14 percent at year-end 2012.
In Moody's view, the trend of improving asset quality metrics will also continue to contribute to the stability of capital levels.
The rating agency says that most banks have sufficient capital to absorb losses under the agency's central scenario, and it expects most banks' funding and liquidity profiles to remain stable, supported by sufficient levels of liquid assets, low reliance on market borrowings and growing customer deposits, the report said.
Moody's notes that improvements in asset quality metrics should also lead to marginal improvements in banks' profitability over the outlook horizon against the background of favourable credit conditions and lower loan-loss provisions in Azerbaijan. However, the rating agency says that the system-average profitability metrics will remain constrained by weak net interest margins driven by low-interest corporate loans that dominate most banks' loan portfolios.