According to assessment of the IHS Global Insight, the recent global financial and economic turmoil has placed enormous strain on banking sectors around the world. In a number of cases, emerging market banking sectors have experienced crisis or near-crisis conditions and are now struggling toward recovery with varied levels of success and continuing vulnerability. From a regional perspective, the greatest turmoil has been seen in the CIS and Eastern Europe, but the UAE and Nigeria are other notable individual examples. Still other emerging market banking sectors are not in crisis at present, but our analysis indicates that their near to medium-term crisis risk is very high. Among these, we believe Vietnam, China, and Cambodia are principal countries to watch.
VIETNAM
Although publicly overshadowed by headline-grabbing concerns about China, risks to Vietnam's banking sector are similarly severe. Several years of very high credit growth and a substantial buildup of financial leverage, compounded by inadequate credit-risk-assessment practices and lending standards, have heightened credit risk and the likelihood of a substantial buildup of nonperforming loans in the near-to-medium term. Credit expansion and deepening of this magnitude over a constrained period of time has historically been followed by a banking crisis within a three-year time horizon. Government ownership of the largest banks in the sector provides them a needed financial backstop that will support their continued viability, although the potential for default on external obligations remains, and smaller private banks have an even higher risk profile.
UKRAINE
Risks remain exceptionally high, as the Ukrainian banking sector is still struggling to recover from a near-total collapse precipitated by the closure of the interbank and foreign capital markets. Asset quality throughout the sector is very weak, and a high level of foreign-exchange credit risk is only partially offset by lending to companies with matching foreign-exchange income. The bank recapitalization program initiated in 2009 has stalled pending completion of debt-restructuring agreements being reached with foreign creditor banks, while the political will and financial resources needed for further recapitalization are both in short supply. At the same time, the sector is experiencing an acute liquidity shortfall with an overall loan-to-deposit ratio in excess of 230%, while the equivalent ratio for foreign-currency lending to deposits is nearer to 300%. A less-intractable political environment may have emerged from the recent presidential elections, and a resumption of negotiations with the International Monetary Fund is to be welcomed, but the outlook remains very poor.
KAZAKHSTAN
There are tentative signs of an improvement in the banking sector in Kazakhstan, but most banks remain highly vulnerable to the rising tide of nonperforming loans. This issue is not expected to retreat while the non-energy sectors of the economy heads further into recession. The crisis of 2008-09 stabilized after the government took majority ownership in two of the major banks, and protracted debt restructuring negotiations involving these banks are nearing completion. Liquidity and funding remain serious problems, however, and a primary objective in the near future is to increase reliance on domestic deposits in local currency. Foreign borrowing as a proportion of total liabilities fell significantly in 2009 and is likely to remain low in 2010. The government has substantial resources with which to provide support to the sector, although such support cannot be assumed for all banks.
UNITED ARAB EMIRATES
While the most extreme liquidity stresses have receded, credit-risk concerns continue to loom large over the UAE banking sector. Global crisis events in 2008 and 2009, combined with a contraction in the highly leveraged UAE economy, exposed the large buildup in banking risks over the past few years. The UAE government was forced to take extraordinary action to stave off a banking crisis by providing liquidity support in the form of government deposits, and solvency support in the form of Tier 1 capital injections into major banks. While liquidity remains strained, the funding situation appears manageable going forward. Nevertheless, credit risk is still very elevated, given high rates of lending growth in prior years, the bursting of the real estate price bubble, and general economic weakness. In addition, the recent Dubai World affair illustrates that sovereign support for quasi-government-owned banks may not be as readily forthcoming in the future as was once expected.
ROMANIA
Despite adequate capital and continuing support from foreign parent institutions, the Romanian banking sector weakened in 2009 as the economy deteriorated and borrowers reported more onerous debt-servicing conditions. The banking sector has been badly affected by the recession and the need for ever-increasing provisions, while profitability has been further eroded by weak credit growth restricting interest and non-interest income, and depressed margins as a result of the higher cost of funds. The parent banks of the nine largest banks operating in Romania reaffirmed their commitment to maintaining their exposure and to ensuring adequate capital levels over 10%, and a US$17.1-billion stand-by arrangement from the International Monetary Fund has provided some relief to the economy and the external balance. Despite these positive developments, the outlook for 2010 remains very difficult.
NIGERIA
The Nigerian banking sector is recovering from a 2009 crisis in which a number of systemically important banks were revealed to be severely undercapitalized. A special audit undertaken by new leadership at the Nigerian central bank revealed previously hidden asset quality problems at 10 major banks that collectively account for one-third of sector assets. This audit indicated that capital levels were dangerously low, and one bank was judged to be technically insolvent. The central bank replaced the management and injected capital into the troubled institutions, while providing substantial liquidity support to the overall sector. While the outlook for the sector is positive, substantial credit risks remain from many years of high credit growth, risky lending practices, and excessive lending concentrations. The sector's recovery will require successful implementation of a government plan to create a receptacle for nonperforming loans and banks' ability to meet recapitalization deadlines.
ECUADOR
Ecuador's banking sector faces substantial risks stemming from the country's vulnerable economic and financial position, as well as negative influences of recent government intervention. The country's dollarization regime is still fragile and requires strong fiscal and external balances, as well as a sound financial system, all of which are currently under attack. Since dollarization in the wake of the country's 1999 financial crisis, the banking sector has not had a lender of last resort, raising liquidity risks. New banking regulations are having a negative impact on the sector. While banks have substantially recovered from the past crisis, they depend on high interest rates and large fees to maintain financial strength, and these are precisely the two main elements revised by law and set by the government since 2008. A recently observed deceleration in economic activity together with weaker consumer confidence in the financial system is imposing additional pressure on bank deposits and financial bottom lines. The possibility of further regulatory intervention to force lending to government-designated sectors of the economy is another lingering threat.
CHINA
The surge in lending during 2009 and 2010 has dramatically escalated crisis risk in China. Similar to Vietnam, Chinese authorities allowed and promoted a massive surge in banking lending in 2009 and 2010 in order to support domestic economic growth amid a sharp drop in external demand. In a context of high preexisting credit depth, as indicated by a credit-to-GDP ratio already over 100%, an increase in the credit-to-GDP ratio of more than 20 percentage points between 2006 and 2009 indicates a significant escalation in financial leverage. Similarly, average annual credit growth over the past three years has been greater than 20%. This massive credit expansion has been accompanied by many concerning lending practices and asset-price-bubble concerns. While obligations to external creditors of the large state-owned banks are likely to be fulfilled in the event of crisis because of government financial support, this is much more uncertain in the case of smaller banks in the sector.
CAMBODIA
Dramatic credit growth rates and inadequate credit risk assessment and lending practices have left the Cambodian banking sector with a very high level of credit risk. Annual credit growth in the three-year period through 2008 averaged 62.8%. This represents an extremely high rate of expansion, even when considering the low starting level of credit depth in the economy. In the report following its most recent Article IV consultation with Cambodia, the International Monetary Fund (IMF) notes that risk factors include excessive credit growth, weak risk-management practices at banks, regulatory lapses, and a real estate price bubble. Because of improper loan classification practices, officially reported non-performing loan (NPL) figures are believed to substantially understate the sector's asset current quality problems. Given asset quality uncertainties, the sector's capital position is likely far weaker than official figures suggest and may prove inadequate for some banks. Finally, the banking sector has been privatized and the level of solvency support that might be provided by the government in a crisis situation is highly uncertain.
BULGARIA
The Bulgarian banking sector faces significant credit risk, and the maintenance of the currency board is essential. Credit risk has surged as the economy has weakened, and the ratio of nonperforming loans has been rising steadily, reaching a record 12% in early 2010. Banks are wary of increasing their exposure to already troubled sectors, especially in construction and real estate, where asset prices have fallen and cash flow has deteriorated. The sector is underpinned by the predominance of foreign banks, which account for 84% of total assets and which have provided capital and liquidity support to their local subsidiaries. The role of the currency board arrangement remains vital in ensuring the virtual elimination of exchange risk in all euro-denominated lending (approximately 58% of total lending in 2009).
Situation in Azerbaijan: expert's opinion
According to the international rating agency Fitch Ratings, liquidity risk and refinancing in Azerbaijani banks are at the background, Moscow's Fitch Ratings banking analytical group head Vladimir Markelov told.
He said that Azerbaijani Central Bank actively assist in stabilizing the situation in the banking sector. It refinanced a number of banks with high external debt burden, thus allowing them to refinance foreign loans.
According to the agency, liquidity risk and refinancing are at the background, since much of the external debt of the banks were repaid. The "liquidity cushion" of assets increased due to lower demand for credit in the economy and also due to tighter control of banks in respect of loan during crisis.
At the same time, Fitch Ratings has identified factors that constitute risks for the banking sector of Azerbaijan in the medium and long term prospect.
The banking sector weight remains low in the Azerbaijani economy, despite the rapid growth before the global financial crisis, Fitch Ratings Banking Analysis Unit Director in Moscow Vladimir Markelov believes.
Azerbaijan (loans / GDP: 24 percent at the end of 2009) yields a number of developing countries, particularly, Turkey (46 percent) and Russia (43 percent) in terms of penetration of the banking services. "In terms of the banking sector, Azerbaijan is characterized by a predominance of basic services - short-term lending, cash management services, money transfers, while other areas of financial markets - stocks, bonds, structured finance, as well as long-term - mortgage, project and infrastructure finance, where banks can participate, is poorly developed in Azerbaijan," Markelov said.
However Markelov believes that the Azerbaijani banking system is still characterized by low levels of corporate governance and weak risk management system. The exception, in his opinion, is the International Bank of Azerbaijan.
About 47 banks have licenses to conduct banking activities in the territory of the republic. Total assets of Azerbaijani banks as of June 1, 2010 amounted to 12.042 billion manat.