Moody's confirms stability in Azerbaijan's banking system
By Nazrin Gadimova
The outlook on Azerbaijan's banking system remains stable, Moody's Investors Service reported on April 29.
Azerbaijan's banking system has remained stable since August 2010, and the outlook reflects Moody's expectation that the country's banks will continue to benefit from a favorable operating environment, stable asset quality, and sufficient capital buffers in the next 12-18 months.
Moody's also believes that demand for credit will be maintained by Azerbaijan's robust economic growth, which will help banks maintain lending margins and profitability.
However, these supportive factors are counterbalanced by the system's structural weaknesses, including the economy's persistent lack of diversification as a result of strong reliance on oil production, the banks' limited access to long-term funding, and high single-name concentrations, the report shows.
Relatively stable oil prices in the coming 12-18 months will continue to support the government's efforts to grow the economy's non-oil sectors, Moody's says.
Moody's has stated that Azerbaijan's GDP will increase by 5.0 percent in real terms in 2014. Azerbaijan's supportive macroeconomic conditions remain a key factor that underpins the country's stable outlook.
The nominal growth of the loan portfolio at Azerbaijani banks will stand at around 20 percent in 2014, a report from the Moody's Investors Service shows.
"Moody's forecasts annualized the nominal loan growth at around 20 percent in 2014 (against the expected inflation of 3.4 percent), compared to the loan growth of 25 percent in 2013," the report says, adding that Azerbaijan's operating environment is expected to broadly support credit demand and borrowers' financial profile.
The rating agency also highlighted Azerbaijan's recent policy to tighten consumer lending, which should help curb growth in this booming segment.
"While the current trend of strong loan growth may represent a latent risk for asset quality, potential credit costs are well-contained by current provisioning and capitalization," Moody's said.
The assets of Azerbaijani banking sector stood at 2.08 billion manats in March 1, 2014, versus 1.67 billion manats in February 2013. Banking assets increased by 24.65 percent over the year. Moreover, local banks increased lending to the economy by 28.34 percent in the first two months of 2014 - up to about 15.7 billion manats.
Out of the total portfolio, loans worth 831.6 million manats (5.31 percent) were overdue compared to 761 million manats in the first two months of 2013.
The statistics of overdue loans do not include similar loans by the non-banking credit institution Aqrarkredit. The overdue loans have increased by 9.3 percent over the past year.
Azerbaijan's Central Bank (CBA) demanded the country's banks to tighten control over the consumer lending. The CBA sent a letter to Azerbaijani banks, asking them to cease granting a loan to the borrowers without demanding their certificate of employment.
In addition to that, the terms of granting loans for car purchase was tightened, which, the experts believe, is due to the worsening of the banking sector's portfolio on this type of lending.