FINANCIAL MIRROR: Negative outlook on Azerbaijan banking amid low oil prices
Moody's Investors Service has maintained its negative outlook on Azerbaijan's banking system for the next 12-18 months, reflecting the rating agency's view that the economy will remain in recession until end-2016 as a result of the depressed global prices for oil – the country's top export – and the subsequent negative effect on the banking sector from currency depreciation.
"A challenging operating environment combined with a significant devaluation of the local currency over the past year, will weigh further on Azerbaijani banks' asset quality, profitability, capitalisation and funding," said Maria Malyukova, an Assistant Vice President at Moody's.
The rating agency forecasts real gross domestic product (GDP) to contract by 3.3% in 2016 as the hydrocarbon sector -- accounting for 31% of economic output and over 90% of exports -- remains depressed, as noted in the sovereign press release on April 29.
Azerbaijani banks' asset quality is also deteriorating, primarily as a result of the country's currency devaluation, given the significant amount of outstanding foreign-currency denominated loans granted to unhedged borrowers.
"We expect an increase in system-wide problem loans in Azerbaijan to around 20% of gross loans by the end of 2016, from 16% in December 2015," explained Malyukova. "This comes as the weaker manat pushes up the debt servicing burden for borrowers amid deteriorating market conditions."
In addition, rising credit costs will likely lead to further declines in banks' profitability and capitalization. The rating agency expects these costs to exceed pre-provision income this year, and according to its base case scenario, Moody's estimates that the system's capitalisation will fall by over 100 basis points over the outlook horizon (including the recapitalisation of the largest state-owned International Bank of Azerbaijan (IBA, Ba3 stable).)
Funding conditions have also weakened, mostly as a result of a loss of confidence in the manat. Foreign-currency denominated deposits increased to 82% of total deposits as of the end of 2015, up from 50% a year earlier. This widens the mismatch between foreign-currency assets and liabilities and increases banks' vulnerability to further exchange rate volatility.
Government support will likely remain stable for the largest, systemically important banks, including government-owned lenders, according to the rating agency. This expectation is based on the government's track record of providing financial support to the largest state-owned bank, IBA, as well as forbearance measures introduced by the regulator to help alleviate pressure caused by the devaluation.
