S&P expects Azerbaijani banks to increase lending in 2023

For 2021-2022, S&P expects that Azerbaijani banks' new lending will remain slow, the agency said in its report on the Caucasus and Central Asia, Report informs.

"We anticipate that banks' credit costs will likely remain at about 2.5%-3.0% of their average loan books, compared with an average of 3.2% over 2015-2019. We expect continued pressure on asset quality with NPLs increasing and banks' profitability eroding over the next two years. We assume that reported NPLs may rise to 10% in 2021 from about 6% at year-end 2020, as officially reported. At the same time, owing to the notable shadow economy, the official numbers might not correctly reflect the debt-servicing capacity of economic agents and the true level of problem loans. As about 50% of total domestic deposits are denominated in foreign currency, high dollarization of customer deposits continues to exacerbate currency and credit risks in the banking sector," the agency said in a statement.

It noted that downside risks remain mainly due to uncertainty of the pandemic's duration and its impact on economic activity. Reduced economic activity and pandemic-related restrictions could exert additional pressure on the economy, specifically the trade, tourism, retail, and hospitality sectors. This, in turn, might further pressure asset quality in the sector.

The agency expects the economy to recover to 4% growth in 2021 and average 1.7% growth over 2022-2024 after a 4.3% contraction in 2020. In addition to the pandemic-related stress, elevated pressure from the recent military conflict over Nagorno-Karabakh will partially offset the positive effect of increased oil prices and recovery in nonoil sectors.

"We see relatively higher oil prices and a pickup in nonhydrocarbon revenue as the pandemic's effects abate, supporting fiscal revenue. At the same time, general government expenditure will rise to higher levels than previously assumed, largely due to the government's planned reconstruction measures and increased funds dedicated to defense and national security," the document reads.

In general, the agency expects banking sectors in the Caucasus and Central Asia to continue recovering from pandemic-related stress, supported by the rebound in economic growth and gradual return of economic activities and social mobility.

"In most regional markets, we expect asset quality to stabilize, supporting sector profitability. However, downside to our forecast remains. A prolonged period of supply chain disruption and slow restoration of international travel and trade might have a negative impact on the economic recovery. Furthermore, regional banking sectors are facing rising inflationary pressures that might eventually lead to tightening of current financing conditions, which could hurt weaker borrowers and impede asset quality recovery.

"Vaccination levels in the region are lagging and diverging widely, indicating that the pace of recovery might be uneven. Furthermore, regional banking sectors are facing rising inflationary pressures that might eventually lead to tightening of current financing conditions, which could hurt weaker borrowers and impede asset quality recovery," the agency said.