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Fitch: Azerbaijani banks’ asset quality deteriorating

08 October 2009 07:52 (UTC +04:00)

Baku. Nijat Mustafayev â€“ APA-Economics. Fitch Ratings says in a special report released today that the deterioration in Azerbaijani banks’ asset quality in 2009 highlights weaknesses in both the banking sector and the broader economy. Although Fitch has not downgraded the Issuer Default Ratings of any Azerbaijani banks during the crisis to date, reflecting available support and already low rating levels, there is significant performance and rating downside risk for the sector in the near- to medium-term, mainly due to asset quality weaknesses.

"The Azerbaijani economy has been less affected by the global crisis than some peers," says Vladimir Markelov, Director in Fitch’s Financial Institutions group in Moscow. "However, asset quality in the banking sector has proved to be sensitive to the weaker operating environment, driven by a sharp contraction in nominal GDP and in real output in some sectors, rapid previous loan growth rates, and relatively weak risk management and corporate governance practices."

At end-H109, impaired loans for Fitch-rated Azerbaijani banks reached an average of 24%, consisting of exposures 90 days overdue (14%) and restructured loans ( 10%); excluding International Bank of Azerbaijan (IBA), impaired loans stood at 17% (5% 90 days overdue and 12% restructured).

The aggregate sector capital ratio remained a solid 20% in H109. However, rated banks’ ratios varied considerably around this mean, with those of Technikabank, IBA and AGBank closest to the regulatory minimum 12%. Reported performance held up in H109 as a lower provision burden offset reduced margins. However, the quality of revenue and adequacy of reserves are sources of concern, suggesting performance, and therefore internal capital generation, may come under greater pressure in H209-2010. Recent legislative changes allow the Central Bank of Azerbaijan (CBA) to support banks’ capital positions through provision of subordinated facilities, potentially with significant loss absorption features.
The near closure of international markets from H208, followed by a sharp drop in corporate deposits and greater devaluation expectations in Q109, strained banks’ balance sheets. However, the CBA supported liquidity at both sector and individual bank levels, and customer funding was more stable in Q209. Refinancing risk should be manageable for most banks, notwithstanding significant foreign debt maturities in Q409-2010, but small, concentrated and volatile deposit bases remain an underlying weakness for the system.
The banking sector continues to suffer from a number of structural problems, including weak corporate governance; a lack of independent and experienced risk management; a high level of government influence on the operations of IBA; considerable fragmentation of the sector excluding IBA; high balance sheet concentrations; a significant share of foreign currency assets and liabilities; and a high loan/deposit ratio.