Moody’s Forecasts Azerbaijani Banks’ Asset Quality to Deteriorate as loans Their Growth Slows

Azerbaijan, Baku, 23 May /corr. Trend A.Badalova / Azerbaijani banks have been enjoying high profitability due to rapidly developing loan bookin recent years, but the banking system remains rather fractured, Moody's Ratings report says. The Agency explains it through 70% of banking assets belonging to seven large banks.

The overall efficiency of Azerbaijani banks compares well with that of banks in other CIS countries and follows similar trends. Efficiency indicators were relatively stable in 2004-2007. The trend of increasing costs has been counterbalanced by the rapid growth in earning assets that resulted in improved income-generating capacity.

In general, the capitalisation of Azerbaijani banks is low compared to international norms. Capital injections from shareholders have been offset by rapid balance sheet growth, which exceeds internal capital generation. In addition, a significant level of single-name concentrations in the loan book and potentially understated levels of related-party lending are putting pressure on the banks' economic capital.

"The banking system's overall asset quality is good, but we view the trend as weakening. Asset

quality ratios have been diluted by a rapidly developing loan book and we also believe that the quality of the loan portfolios will be likely to decline due to the unseasoned nature of loans (especially to new segments such as retail and SME) and untested risk management tools," the report says. In Moody's opinion, the deposit ratings - which currently range from B2 to Baa2 - could be upgraded if the banks: (i) continue consolidating their market shares; (ii) maintain healthy financial fundamentals; and (iii) improve their SME, retail and deposit-taking franchises, reducing concentrations on both sides of their balance sheets. In addition, the ratings could benefit in event of sustained improvements in corporate governance, including (but not limited to) greater ownership transparency and independence in risk management function and management information systems.

Downward pressure on the banks' BFSRs is unlikely in the medium term. However, the deposit ratings of the state-controlled banks could be downgraded if Moody's were to assess the likelihood of systemic support for these banks as having lowered following the further reduction in their government ownership.

"Any potential mismanagement of the banks' growth strategies that resulted in a significant deterioration in their financial fundamentals or asset quality could also have negative rating implications," the report says.

The asset quality of the two state-controlled banks is currently satisfactory and has been on an improving trend in absolute and relative terms.

Strong overall profitability driven by buoyant economic conditions, supported by an increase in higher-yielding loan products

Azerbaijani banks have been enjoying high profitability in recent years. The median return on average assets reported by rated Azerbaijani banks was 2.84% for 2006, compared to 3.57% for 2005 and 2.1% for 2004. For 2007, we expect the banks' profitability to have improved as two of the six rated banks have already reported stronger IFRS results for YE 2007 on the back of widened interest spreads.

Interest income has been the major contributor to operating income, accounting for about 60% of the total at year-end 2007 (2006: 56%). This share is expected to increase going forward.

"We also note that, compared to their counterparts in the other CIS countries, Azerbaijani banks have a relatively strong fee and commission revenue-generating capacity that has historically supported their profitability and contributed 30-37% to operating revenues over the past three years. The increased demand for fee-generated services has made this core revenue stream reasonably diversified, with plastic card operations, transactions with foreign currencies and securities, cash and settlement transactions, issuance of guarantees and letters of credits accounting for the main fee-generating sources. On average, the rated banks earned almost 34.5% of their operating income from these operations based on year-end 2006 results. We expect this share to have declined in 2007 and to continue to do so going forward," mentioned by the report.

"Looking ahead, we expect Azerbaijani banks' profitability to remain good. Low banking intermediation, strong demand for credit and relatively weak competitive pressure will support wide interest spreads, which, in combination with rapid credit growth, particularly in the higher-yielding retail and SME sectors, will ensure the banking sector's high profitability," the report stated.

At year-end 2007, the Azerbaijani banking system had satisfactory liquidity positions, as evidenced by the sufficient amount of liquid assets accumulated, which accounted for 20-30% of total assets. This far exceeded the amount of repayments on foreign borrowings, a major portion of which (approximately US$706 million) is due in 2008.

System growth has been mainly funded by customer deposits, which accounted for 61% of total liabilities as of year-end 2007 (2006: 70%), while international funding is only starting to emerge and is mainly represented by bilateral and syndicated trade-related loan facilities.

Unseasoned loan portfolios in a period of high lending growth could result in higher NPLs

In Moody's view, the recent upward trend in the absolute balance of overdue loans, coupled with the fast-growing loan portfolios (especially retail and SME), could result in higher delinquencies in a maturing loan portfolio. The banks' growing focus on riskier retail lending in an environment where retail customers lack both credit history and experience in servicing credits could also bring additional credit risks.

"It is our opinion that banks' rapid growth in lending, together with the high level of borrower concentration, adds the potential for volatility in asset quality numbers going forward. It should also be noted that the bulk of loans was generated recently and is unseasoned and untested under an economic downturn. The adequacy of risk management tools and independence of banks' risk management function may also reveal weaknesses in a stress environment. Going forward, we expect Azerbaijani banks' asset quality to deteriorate as loans season and their growth slows," the report says.

The correspondent can be contacted at: [email protected]

U.S. sanctions three new Iranian organizations for alleged election disinformation
U.S. sanctions three new Iranian organizations for alleged election disinformation
Iran sees Russia as key defense partner
Iran sees Russia as key defense partner
Iran ready to provide details of January plane crash to Ukraine
Iran ready to provide details of January plane crash to Ukraine
Loading Bars
Latest
With Georgia our relations are excellent, says Azerbaijani president
Armenian government should not try to frighten its population with Turkey - President Aliyev
And after war with Armenia stops, political settlement enforced, role of Turkey will be very important, very positive - President Aliyev
Wounds of war must be healed by political wisdom, by political will - President Aliyev
Armenian government should understand that they are not now in position to dictate - President Aliyev
Best way for future of Karabakh - to live in peace in harmony, try to become good neighbors again, says President Aliyev
Unlike Armenia, from Russia we buy weapons, we pay for them, says Azerbaijani president
Turkey is not involved in the conflict at all - Azerbaijani president
If Armenia didn’t violate ceasefire today clashes would have stopped - President Aliyev
We cleaned completely the Azerbaijani-Iranian border from Armenian occupants, and there will be no more inconvenience for our brothers across river of Araz in Iran - President Aliyev
If Armenia do not stop, we will go until end to liberate all occupied territories - Azerbaijani president
Azerbaijan became already regional hub for not only for energy, but also for transportation - President Aliyev
Armenia - occupier, it obliged to liberate territories of Azerbaijan - Lebanese political scientist
Loans of dead servicemen and persons affected by hostilities to be repaid in Azerbaijan
Recep Tayyip Erdogan: Azerbaijan begins to return its lands
Religious confessions of Azerbaijan demonstrate solidarity in fight against Armenian terror (VIDEO)
65 Azerbaijani civilians, including women, children, killed since beginning of Armenian provocation - Prosecutor General's Office
State-controlled international television and radio network Voice of America apologizes for its mistake (PHOTOS)
Russian Embassy in contact with family of teenager who died as result of Armenian shelling
Azerbaijani flag to be raised in Shusha, Agdere and other lands - MoD
Armenia gives updated list of its soldiers killed in Nagorno-Karabakh conflict zone
Weekly overview of Azerbaijan's financial market
Attacks by Armenia on territory of Azerbaijan - another act of military aggression, says Azerbaijani top official
Teenagers honor memory of Russian citizen who died as result of Ganja shelling by Armenian Armed Forces (PHOTO)
Iran discloses amount of loans issued to industrial and mining sectors
Iran reveals amount of loans issued to agricultural sector
Iranian Energy Exchange announces products to be on sale October 25
Buy/sell operations at Iran Mercantile Exchange decrease
Armenian army’s another combat UAV destroyed by Azerbaijan
Azerbaijan Air Forces destroy military equipment, infrastructure of Armenian troops
Armenian attempts to attack Azerbaijani army units suppressed
New data on Azerbaijani civil casualties, damages from Armenian attacks revealed
Azerbaijani military servicemen act within framework of int'l law - MoD
Terrorist acts against ancient city of Ganja target not only civilian population, but also historical monuments
Argentina extends COVID-19 restrictions until Nov. 8
Armenian terror walks streets of France - Lebanese legal expert
Azerbaijan confirms 220 more COVID-19 recoveries
Air Defense of Azerbaijan shoot down combat aircraft of Armenian Air Force
Reserves of Azerbaijan's Kalbajar region deposits to be re-examined, evaluated
Eight schoolchildren killed, 16 injured due to Armenian terror - Azerbaijan's Ministry of Education
Iran reveals its COVID-19 data for October 24
Azerbaijan fighting misrepresentation of its occupied territories on maps
Armenia shelling Azerbaijan’s Lachin and Gubadli districts from its territory
Import of Uzbek products into Azerbaijan increases
Value-added taxes paid by private sector down in Georgia
Volume of loans issued in Iran increases
Turkmen Ministry of Construction extends tender for construction of checkpoints
Unexploded missile on territory of Azerbaijan’s Goranboy (PHOTO)
Uzbekistan Airport announces tender for water pumps repair
Socio-economic issues in Azerbaijan - in center of attention during COVID-19 - Ali Ahmadov
Expert talks about sanctions against Armenia
Armenia must put end to attacks, illegal occupation of Azerbaijan's territory - Turkish Defense Ministry
Weekly review of events in Azerbaijani agricultural sector
Uzbekistan increases textile products manufacturing
Turkmen Health Ministry to purchase medical equipment via tender
Uzbek-Korean JV announces tender on transport services
Weekly review of Azerbaijan's precious metals market
Azerbaijan informs Russian embassy about Russian citizen killed by Armenia's attacks
Uzbek-Korean Uz-Kor Gas Chemical to buy filters via tender
Azerbaijani diaspora youth actively taking part in media fight against Armenia
Assistant to Azerbaijani president talks teenager killed due to Armenian terror (PHOTO)
Number of online payments reach record high in Georgia
Int'l financial institutions eye to provide assistance to Uzbekistan’s energy sector
Georgia’s coronavirus cases reach 26,503
Armenians barbarously exploited mineral deposits in Zangilan - Azerbaijani Ecology Ministry
Armenia at state level continues terror attacks on Azerbaijani civilians – assistant to president
Azerbaijani oil prices down
Teenager in Azerbaijan's Ganja city dies from wounds following Armenia's missile attack
Salt production growing in Turkmenistan
Uzbekistan's Ministry of Internal Affairs announces tender on equipment supply
Volumes of cargo transshipment from Algeria through Turkish ports revealed
Armenia shelling Azerbaijan’s Gubadli district by using artillery installations
Armenia's missile fire on Azerbaijan's Tartar kill 16-year old teenager - top official
Iran expects to expand oil barter with necessary goods
Azerbaijan's Naftalan, Tartar under heavy fire from Armenian troops
Georgia reveals ATM transaction statistics
Azerbaijani Armed Forces destroy military equipment of Armenia (VIDEO)
Azerbaijani Bar Association appeals to world's lawyers
Armenia's political leadership now has to take several difficult steps - Russian expert
Uzbekistan, China in talks over co-op in IT sphere
Weekly review of Azerbaijan's currency market
Armenian Armed Forces shelling settlements in Azerbaijan’s Tartar and Barda
Turkmenistan to expand its network of trading houses
Armenian armed forces firing at Azerbaijani territories in Goranboy-Naftalan direction
Armenian gov't using visit of German MPs to Nagorno-Karabakh region for propaganda
Azerbaijani president gives interview to Le Figaro newspaper (PHOTO)
OIC 'struck with astonishment' at unexpected discourse from certain French politicians
Ukraine puts Georgia on list of 'red zone' countries
Uzbekistan reveals its COVID-19 data for October 24
Turkmenistan to expand co-o with Italian company for purchase of equipment
Azerbaijan destroys Armenian strongholds, takes over important heights - MoD
Azerbaijan destroys Armenian army’s combat UAV (PHOTO)
Total assets of Bank of Baku increase
Iranian currency rates for October 24
Iran allocates more funds to complete Narm-ab dam in Golestan Province
Austrian company to help expand radio broadcasting networks in Turkmenistan
Ukraine's ex-president, Vice Chair of Museum of Jewish Heritage send letter to Azerbaijan's president
'Smerch' missile launched by Armenia lands in private house garden in Azerbaijan (VIDEO)
Azerbaijan's ANAMA clears out unexploded ordnance from occupied lands (PHOTO)
Firing at Azerbaijani civilians by Armenia is flagrant breach of int’l law - UK Member of parliament
All news