Fitch: Largest banks in Azerbaijan have less incentive to refinance their Eurobonds

The largest banks in Azerbaijan have less incentive to refinance their Eurobonds maturing in 2024–2025 given their comfortable liquidity positions, Report infoms, citing the Fitch Ratings.

According to the agency, the International Bank of Azerbaijan (BB-/Positive) had a particularly low loans/deposits ratio of 50% and a low blended funding cost of 1.4% at the end of 2023.

CIS+ banks’ Eurobond debt issuance will increase significantly in 2024 and 2025, albeit from a low base, driven by refinancing needs, favourable economic conditions and positive investor sentiment, Fitch Ratings says.

Eurobonds totalling $1.4 billion have been issued this month, and issuance this year has already exceeded the recent peak of $1.3 billion in 2020.

“Issuance declined steeply in 2022 and 2023, when market volatility due to the military conflict in Ukraine and rising interest rates deterred investors. This year’s rebound has been spurred by debt maturities of $2.7 billion scheduled for 2024–2025, but has also been supported by favourable economic conditions, which should continue to boost loan growth, and strong bank performance. Banks in the CIS+ region, like those in GCC countries and Turkiye, also benefited from improved investor sentiment towards emerging markets in 1Q24, and from investors looking to lock in higher interest rates,” Fitch Ratings said.

The agency notes that pent-up demand following a prolonged period of limited issuance and the shut-out of Russian issuers from international markets have also played a part in the revival of CIS+ bank issuance: “Russian issuers used to be the largest borrowers in the region, and some investors may be looking to the broader CIS+ region to fill the gap. Lower US dollar interest rates should also stimulate further issuance.”

Fitch expects the Fed to cut rates by 75bp in 2024 and 125bp in 2025.

“Development Bank of Kazakhstan (DBK; BBB/Stable), a Kazakh quasi-sovereign entity with proven access to foreign funding and a heavy reliance on external borrowings, was the first CIS+ bank to tap the international markets this year, raising the equivalent of $0.7 billion in senior unsecured debt this month. We expect DBK to tap the market several more times given its $1.7 billion of maturities in 2025–2027. Other Kazakh banks may also look to issue given the gradual increase in the Kazakh banking sector’s loans/deposits ratio. The ratio increased to 83% at end-2023 (end-2021: 72%), and loan growth prospects are strong. However, liquidity generally remains abundant, and foreign-funding refinancing needs for the sector are limited.

“DBK was followed by Georgia’s two largest banks, Bank of Georgia and TBC Bank (both: BB/Stable), which front-loaded their additional Tier 1 (AT1) issuance ahead of call dates, each placing $0.3 billion of AT1 perpetual debt this month. Georgian banks are the only ones in the CIS+ region issuing subordinated Eurobond debt. TBC Bank also has $0.25 billion of senior Eurobonds due in June 2024, which it may refinance before maturity.

“We expect Uzbek banks to start refinancing their Eurobonds ahead of the $1 billion of maturities in 4Q24 and 2025 following the rollover of Uzbek sovereign Eurobonds earlier this year. Ipoteka-Bank (BB-/Stable) is placing the equivalent of $0.1 billion in senior unsecured notes this month. External foreign-currency debt is an important part of Uzbek banks’ funding profiles, as reflected in the high sector-average loans/deposits ratio (end-2023: 195%). Some Uzbek banks are also likely to issue Eurobonds for the first time this year to help fund loan growth,” Fitch Ratings said.