BAKU, Azerbaijan, December 22. S&P Global Ratings has noted a decrease in the level of dollarization on deposits in Azerbaijan's banking system, as well as strengthening of funding profile of the country's banking system, Trend reports.
"The share of deposit dollarization is gradually decreasing. The share of deposits in foreign currency decreased to 41 percent of total customer deposits (legal entities and individuals) as of October 31, 2023, which is a decrease from 79 percent at the end of 2015. This indicator is lower than in Georgia (51 percent) and Armenia (50 percent)," the agency said.
S&P identifies differences between the volume and maturity of foreign currency loans and deposits, noting that banks actively use hedging to mitigate the risks of their open currency positions. The agency emphasizes that in Azerbaijan over the past five years there have been no cases of bank defaults caused by mass withdrawal of deposits by clients.
In general, S&P believes that the funding profile of Azerbaijan's banking system has strengthened over the past few years and according to the agency's estimates, 2/3 of deposits and contributions of Azerbaijan's banking system are held by legal entities and 1/3 by individuals.
"We believe that these factors give additional strength to the funding profiles of banks in Azerbaijan. According to our forecasts, the ratio of total loans in the banking system to underlying customer deposits (100 percent of retail deposits plus 50 percent of corporate deposits) will increase slightly, but will remain below the 110 percent level in 2024-2025," the agency said.
S&P emphasizes that Azerbaijan's banking sector is a net external creditor.
"We believe that the level of Azerbaijan's banking sector's dependence on external borrowing is lower than the average of comparable countries. This indicates a more limited diversification of funding sources for Azerbaijani banks, as well as a greater dependence on domestic savings and a newly developing domestic market for debt tools," the agency pointed out.
In this regard, S&P has improved its industry risk assessment from "9" to "8" and now classifies Azerbaijan's banking system as group "8" rather than "9" on Banking Industry Country Risk Assessment (BICRA).
"Following this, we have also upgraded the base rating of banks operating predominantly in Azerbaijan from 'b+' to 'bb-'. We assess economic and industry risk trends for Azerbaijani banks as stable, reflecting generally balanced risks over the next 12-18 months," S&P emphasized.