S&P starts evaluation of Azerbaijan's fintech market

The international rating agency S&P Global has set the 'b' anchor for fincos in Azerbaijan, Report informs referring to S&P.

"The anchor is the starting point of our rating analysis for banks and fincos. We base it on our Banking Industry Country Risk Assessment (BICRA). BICRAs evaluate and compare the relative strength of different banking systems and highlight the economic and industry risks associated with a country's financial system on a scale from 1 (lowest risk) to 10 (highest risk)," reads the statement. "Our 'b' anchor for fincos in Azerbaijan is two notches below the 'bb-' anchor for banks. We believe fincos in Azerbaijan face incrementally higher industry risk than banks because they are more dependent on market-sensitive funding, owing to their lack of access to central bank funding. In addition, they operate under weaker regulatory oversight and a weaker institutional framework, with higher competitive risk and typically less stable revenue through economic cycles."

For comparison, the finco anchor in Kazakhstan is 'b+', two notches below the 'bb' anchor for banks. Similar to the situation in Azerbaijan, lack of access to central bank funding and weaker regulatory oversight increase risks in the sector.

S&P Global Ratings expects its ratings in the global nonbank financial institution sector to remain relatively stable in 2025, though some issuers' profitability will be tested amid high economic uncertainty and likely bouts of volatility. Challenges such as US tariffs could affect global economic performance, supply chains, and credit conditions and in turn present stumbling blocks for nonbank financial institutions (NBFIs).

Risks will be most pronounced for issuers that rely heavily on short-term funding or that have long-term funding due to mature within the next 12 months. NBFIs still rely on unsecured bond markets to generate stable funding, and bouts of volatility could destabilize capital bases quickly.

Even so, 89% of our ratings on global fincos have stable outlooks, and the average rating is 'BBB-'. Furthermore, rating actions were relatively contained in 2024 and tended to be idiosyncratic.

US trade policy could complicate credit conditions for some fincos around the globe. The Trump administration has moved quickly to impose new tariffs on goods imported from several countries. In S&P Global Ratings economists' view, the US tariffs and trading partners' countertariffs will lead to across-the-board lower GDP growth, higher unemployment rates, and higher inflation. These effects will be larger for smaller and relatively trade-dependent economies.

Higher tariffs could also reignite inflation and slow--or reverse--the descent in policy interest rates, potentially causing uncertainty around fincos' growth opportunities, straining asset quality, and raising funding costs.

The consistency of funding through the cycle is essential to the industry's ratings stability, given its funding is largely from wholesale sources. A rapid worsening in funding and liquidity conditions remains the greatest risk for the sector.

As interest rates have declined from their peak, coupled with tightening credit spreads and increasing investor risk appetite, NBFIs in some jurisdictions have been able to diversify their funding mix by accessing the unsecured market.

"For 2025, although the exact pace and extent of rate cuts remain uncertain, we anticipate interest rates will remain higher than historical levels. Still-high rates in some jurisdictions will likely limit many NBFIs' access to funding, mainly secured debt issuances, as market volatility bubbles below the surface. Nonetheless, the continued descent in interest rates could release pressure on funding costs and help some fincos take advantage of business opportunities.

Fincos' reliance on confidence-sensitive funding already constrains ratings in the sector. But the sector's resilient performance in 2024 proved many fincos have developed versatile and robust funding franchises. That resilience will be tested again this year with periods of heightened volatility and ongoing economic uncertainty, which could chisel away at ratings stability."

"Pockets of risk could persist for fincos that focus on commercial real estate (CRE) and small and midsize enterprise (SME) loans. We anticipate underlying asset quality risk to manifest for CRE companies in real estate owned and for fincos exposed to SMEs in unrealized and realized losses, nonaccruals, and amended payment in kind. In our base case, we don't foresee any significant downturn in these markets this year.

And while some global fincos have been able to control their operating expenses to cope with lower NIMs, many have maintained business growth and are looking to invest in their platforms rather than retreat."