Fitch: CIS banks stable, but dependent on commodities, macro policies

Business Materials 18 December 2012 20:50 (UTC +04:00)
The outlooks for banking sectors in the Commonwealth of Independent States (CIS) and Georgia in 2013 are stable.
Fitch: CIS banks stable, but dependent on commodities, macro policies

Azerbaijan, Baku, Dec. 18 /Trend/

The outlooks for banking sectors in the Commonwealth of Independent States (CIS) and Georgia in 2013 are stable. This reflects Fitch's expectation of positive economic growth across the region, which should support banks' asset quality and performance. However, prospects for banks in commodity-driven economies (Russia, Kazakhstan, Azerbaijan and Uzbekistan) are more settled, while there is greater uncertainty about macroeconomic stability and/or policy in Ukraine, Belarus and (to a lesser extent) Georgia. This was stated in newly published special report of the Fitch Ratings agency on Tuesday.

Most banking systems in the region still suffer from significant fundamental weaknesses and/or have yet to fully recover from the global crisis. This creates significant downside risk, in particular, in the case of further negative events globally or lower commodity prices. Kazakh and Ukrainian banks remain most burdened by high levels of impaired loans, while Ukraine and Belarus, due to those countries' weak external finances and policy uncertainty, are most at risk of broader financial market and macroeconomic stress.

Russian banks' loan growth will probably slow in 2013 due to funding and capital constraints and tighter regulation of retail lending. The slowdown will likely support stabilisation of key sector credit metrics, but reliance on state funding should increase and profitability should moderate as margins tighten. Asset quality and leverage ratios should be unchanged, but legacy corporate problems and rapid retail growth are risks for some banks, and tighter capital regulation could be onerous for lenders with thinner equity.

Strong commodity-driven growth in Kazakhstan has started to be reflected in banks' business volumes (e.g. in retail lending) and also may support the slowly recovering real estate market. This should be moderately favourable for banks' asset quality and performance, although the sector remains burdened by still large amounts of problem loans and weak capital quality, while competition is pressuring margins and profitability.

The performance of banks in Ukraine and Belarus in 2013 will be highly dependent on macroeconomic developments, with banks' asset quality, capital ratios and deposit stability potentially vulnerable to exchange rate weakness and its impact on economic activity. However, in both markets banks enjoy flexibility in problem loan recognition, and significant foreign and/or state ownership provides some fall-back in terms of support.

Fitch's expects Georgian banks to again perform soundly in 2013, supported by a still growing economy and solid management. However, the change of government has given rise to some uncertainty about near-term economic policy and performance, somewhat clouding prospects for the country's banks.

Further negative shocks to the global economy would increase the risk of lower oil prices, which would be negative for economic growth, asset prices and exchange rates in Russia, Kazakhstan and Azerbaijan, and hence for credit profiles of banks in those countries. Regulators and banks could probably manage through a short-lived oil price/recession shock, but prolonged weakness would be credit negative.

A larger than expected devaluation in Ukraine and its potential impact on growth would be negative for banks, as would renewed build-up of macroeconomic imbalances in Belarus. In Georgia, deterioration in political stability, inappropriate policy settings or increased external financing risks would be a concern.