"Azerbaijani banks face growing challenges to their business growth and earnings prospects. These, combined with persistent external vulnerabilities, could hit banks' capital buffers, asset quality, and funding stability harder than we previously envisaged," Report says, citing "S & P Global Ratings" International Rating Agency.
"We assume that reported Non-Performing Loans (NPL) may rise to 12%-15% in 2020-2021, from about 8% at year-end 2019. At the same time, we believe that the peak in NPLs and the bulk of asset quality deterioration could crystallize only in 2021. Thus, the impact on Azerbaijani banks' profitability from additional provisioning could be deferred over 2020-2021.
"Steep depreciation of the Azerbaijani manat over the past few years has led to protracted currency imbalances between banks' assets and liabilities, due to the increased share of foreign currency funding in banks' customer funds (more than 60%).
"The exchange rate remains under pressure in a volatile macroeconomic environment. Disorderly adjustments to parity might destabilize the macroeconomic situation and increase credit risks in the banking sector."