BAKU, Azerbaijan, March 5. According to a report by the international rating agency Fitch Ratings, Azerbaijan's banking sector has high liquidity quality in 2023, making it one of the most resilient in the CIS+ region, Trend reports.
Based on information the loan-to-deposit ratio stood at 60 percent, while in Armenia and Georgia, the deposit portfolio remained stable after a significant inflow of non-residents in 2022 and the loan-to-deposit ratio reached 90-100 percent.
"Banks in the South Caucasus are currently in an advantageous position due to positive trends in the credit sector. These trends are driven by a favorable operating environment, strengthening sovereign credit profiles, and rapid economic growth in the region. Improved revenue generation, growing business volumes, and creditworthiness above historical averages have led to several positive rating actions in recent years," the agency notes.
Fitch emphasizes that many banks in the region have reported record highs in 2022-2023, and forecasts that they will continue this growth trend.
"Bank profitability in these regional markets was supported by the expansion of interest margins, which increased by 1-2 percentage points. This growth was driven by higher returns on assets with low funding costs due to excess liquidity. Banks in Armenia and, to a lesser extent, Georgia, also benefited from increased revenues due to immigration and inflows from Russia. At the same time, the efficiency of Azerbaijani banks is supported by high oil prices and lower risks affecting the quality of their assets," the report says.
The agency notes that favorable macroeconomic conditions and stable credit growth are contributing to the continuous improvement of credit quality indicators across the region.
"Positive dynamics are particularly noticeable in Azerbaijan, where there has been a significant reduction in the risks associated with previous years' loans in the banking sector. This has been facilitated by a shift from concentrated and dollarized corporate exposures to more diverse retail lending in local currency, as well as active lending to micro and small enterprises. In addition, the improvement is being driven by more effective regulation and supervision by regulators," Fitch underlines.
Fitch analysts believe that the de-dollarization of the banking sector in the region in recent years has been supported by increased retail lending and local currency stability. However, dollarization remains high in Georgia (45 percent of loans by end-2023) and Armenia (36 percent), which remains a major risk factor for banks' asset quality in both countries.
"In recent years, there has been a positive trend in bank ratings across the region. In Azerbaijan and Georgia, banks have a positive outlook, indicating growth potential," Fitch concludes.
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