Moody's: Outlook changes to negative for Azerbaijan's banking system

Economy Materials 1 July 2015 15:45 (UTC +04:00)

Baku, Azerbaijan, July 1

By Azad Hasanli - Trend:

Moody's Investors Service international ratings agency has changed the banking system outlook to negative from stable for Azerbaijan (Baa3 stable), said the report "Banking System Outlook: Azerbaijan" published June 30 on its website.

Moody's forecasts that Azerbaijan's GDP growth will slow to 1 percent in 2015, based on an assumption of oil prices averaging $55 per barrel this year, and that growth will only recover to 1.7 percent in 2016.

Slower economic growth of Azerbaijan can be partially offset by government spending initiatives backed by a sizable pool of accumulated foreign-currency reserves (70 percent of GDP as of year-end 2014), the agency said.

Moody's report said that alongside the weak operating conditions, the local-currency devaluation in February of this year is credit negative for banks. "We believe that banks' asset quality will deteriorate following the local-currency devaluation, as most foreign-currency loans in Azerbaijan are to borrowers that do not have foreign-currency revenues," Maria Malyukova, a Moody's Analyst and author of the report said.

"Moreover, higher inflation reducing consumer spending power and seasoning of banks' loan books amidst a slowdown in lending growth will also contribute to an increase in problem loans to not less than 15 percent of gross loans this year from 11.4 percent at the end of 2014," she said.

"We estimate the immediate negative effect on system-wide banks' capitalisation from the revaluation of foreign-currency assets at around 2 percentage points," said Malyukova.

"However, most rated banks' buffers are sufficient to absorb expected losses under the central scenario of our stress test. On the funding side, the devaluation weakened depositor confidence, causing significant deposit shifts into foreign currency, widening mismatches between banks' FX assets and FX liabilities."

Stress tests were carried out in Bank Technique, Bank Respublika, Unibank, Xalq Bank, Bank of Baku, Kapital Bank, VTB Bank (Azerbaijan) and International Bank of Azerbaijan rated by Moody's.

There are 45 banks in Azerbaijan.


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