Azerbaijan, Baku, May 14 / Trend A. Akhundov /
The Azerbaijani banking industry is in an expansion phase, Standard & Poor's said today.
"We project that credit will expand faster than the underlying economy: about 10%
in 2012, a level close to the 8.1% growth of loans in 2011," the message said.
Despite these very high loan growth rates in nominal terms, credit growth expressed in percentage points of GDP has been low.
Even though this is somewhat distorted by the oil-inflated GDP, we think this suggests an absence of credit-fueled bubbles. In addition, growth of inflation-adjusted residential housing prices is sluggish. We believe that mortgage loans do not represent a major risk for Azerbaijan's banking sector because the segment is underdeveloped. Therefore, we do not consider Azerbaijan as an economy in the process of building up imbalances. This is the main factor explaining our "low risk" assessment for economic imbalances, the message said.
Azerbaijan has low levels of corporate and personal indebtedness.
The level of financial intermediation is indeed low, reflected in the 21% ratio of bank
loans to private and nonfinancial public enterprises to GDP at year-end 2011.
Nevertheless, our "extremely high risk" assessment of credit risk in the economy largely stems from our opinion of banks' relaxed underwriting standards, with a weak payment culture and rule of law, the message said.
Our revised industry risk score for Azerbaijan is '8'. This reflects that we have maintained our assessment of "very high risk" in the institutional framework and in systemwide funding and changed our assessment of competitive dynamics to "high risk" from "very high risk".
The Central Bank of Azerbaijan has the ability to intervene and take preventive measures, through external administration and other mechanisms.
The Central Bank's response to the crisis was adequate and timely in our view.
It lowered the refinancing rate and reserve requirements on liabilities several times. The Central Bank also provided direct liquidity support to some commercial banks. During the crisis no banks in Azerbaijan defaulted. The Central Bank has managed to retain an adequate level of depositor confidence in the system, supported by various measures, including a deposit insurance compensation mechanism that has been in effect since August 2007, the message said.
However, we consider that the Central Bank's quasi-fiscal activity undermined asset quality, as belatedly indicated by the increase in nonperforming loans (NPLs). We note that regulatory forbearance allowed the largest state-owned International Bank of Azerbaijan (IBA) to accumulate a significant amount of NPLs on its balance sheet and continue to operate with a breach of capital covenants for a prolonged period. This underpins our "very high risk" assessment of the institutional framework, the message said.