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16 Aug 2010
Moscow, August 16, 2010 -- The outlook for Azerbaijan's banking system has been changed to
stable from negative, reflecting the recent stabilisation in the
banks' asset quality and liquidity and improving profitability and
capitalisation, says Moody's Investors Service in its new Banking
System Outlook on Azerbaijan. The banks are also benefiting from
the relatively stable macroeconomic environment within Azerbaijan,
while low banking penetration offers opportunities for long-term
growth. The outlook expresses Moody's expectations for the
fundamental credit conditions in Azerbaijan's banking system over
the next 12 to 18 months.
Moody's also notes that while the key outlook drivers have stabilised,
this stabilisation occurred at a very weak level and there remain difficult
challenges. This is reflected in the low average Bank Financial
Strength Rating (BFSR) of E+. "Azerbaijan's oil-based
economy remains sensitive to external shocks, and the banks'
credit-risk appetite remains high, evidenced through significant
lending concentrations, related-party exposures, and
a high share of FX loans. Additionally, the risk-management
and underwriting standards of Azerbaijani banks remain sub-par,"
says Lev Dorf, Moody's lead analyst for Azerbaijani banks
and author of the report.
Moody's believes that the level of problem loans (loans 90+
days overdue, and restructured loans) has now peaked at 15%-17%
of gross loans, in mid-2010. Problem loans are likely
to remain stable at this level until the end of 2010. "Since
the banks have already covered most of the anticipated loan losses,
Moody's does not expect loss provisions to constrain the banks'
profitability during the outlook horizon. We expect the banks'
profitability to improve due to an acceleration in credit growth and an
increasing proportion of higher-yielding assets on bank balance
sheets," explains Mr Dorf.
We do not expect pressure on banks' capital levels this year and
next. According to data from the Central Bank of Azerbaijan (CBA),
the total system's current capital adequacy ratio (CAR) was 17%
at year-end 2009, compared with the regulatory minimum CAR
of 12%. Capital levels improved in 2009 for all Azerbaijani
banks rated by Moody's. "This partly mirrors the slowdown
of loan growth in 2009, and since any additional required loss coverage
is likely to be small, this will not negatively affect capitalisation
this year," adds Mr Dorf.
While liquidity has stabilised, the banks remain dependent on central
bank funding, although the rating agency does not expect the banks
to face any near-to-medium-term liquidity pressures
or refinancing problems given their relatively liquid balance sheets.
The increase in liquid assets is mainly due to weaker loan growth and
liquidity support measures implemented by the CBA. The banks'
liquidity positions have also benefited from an increased steady inflow
of deposits after a period of deposit outflows in early 2009.
Moody's report, entitled "Banking System Outlook: Azerbaijan",
is available on www.moodys.com
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Moody's: Outlook changed to stable from negative on Azerbaijan's banking system
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