Azerbaijan, Baku, July 29 / Trend N. Ismayilova /
However, Fitch expects that the currently high oil price, if sustained, will support the stabilization and recovery of the non-oil economy, which should in turn be beneficial for banks' asset quality, deposit bases and liquidity. In addition, the relatively strong sovereign balance sheet gives it significant firepower to provide support to the small banking sector, in case of need, the report said.
Fitch expects GDP growth to slow to 3.2 percent in 2011 (4.0 percent in 2012), compared with 5 percent in 2010 and 9.3 percent in 2009, due to flat oil production and the slow pace of structural transformation in the non-oil sector. In addition, the agency notes that economic performance is highly dependent on the oil price, and swings in nominal GDP can be large, resulting in volatility in banking sector liquidity and asset quality. Growth in the non-oil sector should, though, be supported in the near term by increasing government spending and significant capital investments.
Loan growth is likely to accelerate somewhat in 2011-2012, in Fitch's view, on the back of the ongoing recovery in the non-oil economy.
Although the majority of banks were profitable in 2010, and sector net income remained positive in Q111, performance has suffered from a sharp reduction in margins and elevated credit costs. Fitch expects margins to remain under pressure due to sizeable holdings of liquid assets and intensifying competition for quality borrowers.
NPLs at Fitch-rated banks (which account for approximately two-thirds of sector assets) reached 14 percent of gross loans at end-2010 (see Figure 32), compared with only 5 percent problem assets reported by the Central Bank for the sector. The agency believes that further downside risks for banks' underlying asset quality are limited at present, supporting Stable Outlooks on most Azeri banks.