Moody's: Deposit base of Azerbaijan's bank sector unstable

Baku. 26 July. REPORT.AZ/ The performance of banks in Azerbaijan will remain constrained by a weak operating environment and high foreign-currency risks.

Report informs, Moody's Investors Service says in a report published on July 26.

"We expect that the continued economic contraction in 2017, combined with weak credit demand and high inflation will contain Azerbaijani banks' lending growth," said Maria Malyukova, Assistant Vice President at Moody's.

Moody's forecasts the economy will shrink by 1% this year, following a severe recession in 2016, before returning to growth in 2018.

Weak asset quality will further constrain banks' profitability and capital, after the level of problem loans (which include overdue and restructured loans) surged to 30% of gross loans at Moody's rated private banks at the end of 2016, from 16% in 2015.

According to Malyukova, problem loan levels will remain elevated given the adverse market conditions, borrowers' limited capacity to service their debt and their vulnerability to foreign-exchange risk.

Moody's expects most Azerbaijani banks to be loss-making again in 2017 as credit costs exceed pre-provision income and net interest margin remains tight, due to subdued loan origination and the high level of non-performing loans. In addition, because of the unhedged open short foreign-exchange positions at many banks, the banking system remains vulnerable to currency volatility.

"Capital buffers will remain under pressure from heightened credit losses and foreign-exchange risks. A further possible tightening of regulation could also require additional recapitalization by banks.A very high level of deposit dollarization, representing 75% of total deposits at end-2016, is a key funding risk. This has led to lack of local-currency liquidity and large foreign-currency mismatches. Funding prospects for Azerbaijani banks are subdued given their volatile customer deposit base, and limited and costly access to debt capital markets," the report reads.

The government's recent decision to restructure the foreign debt of state-owned International Bank of Azerbaijan (local currency deposit rating: Caa1 Positive ) reflects a change in its support approach for the banking industry and highlights the low degree of its policy predictability.