Azerbaijan, Baku, August 2 / Trend A. Badalova /
The outlook for Azerbaijan's banking system remains stable, says Moody's Investors Service in a Banking System Outlook published today. This reflects Moody's expectation that the banks will benefit from a favourable operating environment, stabilising asset quality, improving profitability and adequate capital levels.
"We expect that the operating environment will remain favourable for the banks over the next 12-18 months, which will support their growth and profitability and lead to asset-quality improvements," explains Lev Dorf, a Moody's analyst and author of the report.
Moody's forecasts that Azerbaijan's oil-based economy will produce solid growth in 2011 and 2012, driven by high oil prices. This will continue to support increased government spending that is boosting the non-oil sector and creating business opportunities for domestic banks.
"Supported by the favourable operating environment, banks' asset quality will likely continue to improve over the outlook horizon, after stabilising during Q4 2010. Data received from the banks up to end-June 2011 indicates that asset quality has marginally improved during H1 2011, although problem loans remain high," adds Mr Dorf.
The system-average problem-loan level -- loans overdue by more than 90 days, plus restructured loans -- peaked at around 17% of gross loans in Q3 2010. Moody's expects that the share of problem loans will likely decrease to around 14% by year-end 2011, driven by credit growth and recoveries on problem loans that could be higher than allocated provisions.
Most banks' capitalisation will likely remain stable over the outlook horizon, as expected internal capital generation through higher earnings will be offset by increased risk-weighted assets. Over the near term, Moody's does not expect system-wide capital injections from banks' shareholders. With an average Tier 1 ratio of 13% and a total capital adequacy ratio (CAR) of 16% at year-end 2010, most rated banks had sufficient capital to absorb losses expected under a base case-scenario and to support the moderate growth of 10-12% that Moody's expects for 2011.
In the report, the rating agency also notes that these supportive factors are balanced by the banking system's fundamental challenges, including (i) high system-wide dollarization and high credit concentrations (indicative of the banks' high risk appetites); (ii) sustained high problem-loan levels; and (iii) the under-capitalisation of the state-controlled bank, International Bank of Azerbaijan (IBA), which dominates the banking system.
Moody's report, entitled "Banking System Outlook: Azerbaijan", is available on www.moodys.com