Fitch expects NPL growth in Azerbaijani banking sector

Business Materials 12 December 2016 17:36 (UTC +04:00)

Baku, Azerbaijan, Dec. 12

By Azad Hasanli – Trend:

The non-performing loans (NPLs) increased to 16 percent at end-1H16 from 10 percent at end-1H15 in Azerbaijani banking sector and NPLs are expected to exceed 20 percent in the country’s banks in 2017, Fitch Ratings analysts said.

Fitch believes that sector gross loans may contract by 25 percent in 2016 and 10 percent in 2017 due to large problem assets sales made by the country’s largest bank, International Bank of Azerbaijan (IBA), sluggish demand and capital constraints at smaller banks, Fitch Ratings' Report: 2017 Outlook: CIS and Georgian Banks said.

Fitch estimates that at end-3Q16, Azerbaijani banks’ FX-denominated liabilities exceeded their foreign-currency-denominated assets by at least 7 billion manat.

Banks are increasing dollarization of new lending to close their short FX positions, although this may further weaken their asset quality, the report said.

However, Fitch’s base case is for a stable currency in 2017.

Azerbaijan's banks face capital and liquidity pressures from currency mismatches and asset-quality deterioration in heavily dollarized loan books, the report said.

“Material capital shortfalls and large losses mean we expect further bank failures and clean-up measures next year,” the report said. “However, substantial state support for International Bank of Azerbaijan remains in place and we expect the clean-up of the bank's balance sheet to be completed next year.”

According to Fitch, public confidence has stabilized after substantial retail deposit outflows in 1Q16 but remains sensitive to currency moves.

The Azerbaijani central bank funding of the system has doubled since the first devaluation in February 2015 and exceeded 20 percent of sector liabilities at end-3Q16, reflecting liquidity shortages across the system.

Some 32 banks operate in Azerbaijan.