International rating agency Moody’s increased the forecast on the banking system of Azerbaijan from “Stable” to “Positive”.
Moody’s believes that this forecast reflects their expectations as to how the creditworthiness of banks in the banking system will change during the forecast period of 12-18 months.
The continuing economic growth and unprecedented support of households from the state are the main factors that influenced the assignment of a “Positive” forecast to the banking sector of Azerbaijan, the agency says in its report.
“We expect acceleration of the pace of Azerbaijan’s economic growth up to 3% in 2019-20, given the favorable world prices for energy carriers, growth of exports and increase of the share of nonoil sectors in the economic structure. The reforms carried out by the government should have a positive impact on the growth of the domestic economy. Nevertheless, the domestic economy remains vulnerable to changes in oil prices,” agency’s analysts think.
Moody’s also expects further improvements in the quality of bank assets through the clearance of banks’ balances and government’s support to households.
The agency assumes that by the end of 2020 the share of problem loans should fall below 10% and capital adequacy indicators throughout the banking system will be stable.
“According to our baseline scenario, the capital adequacy indicators of the banking system as a whole will be stable due to the increase in banks’ profits and the growth of risk-weighted assets. The consolidation of the banking sector will continue,” Moody’s thinks.
In Moody’s analysts’ view, the reduction in the number of banks was the result of the financial difficulties experienced, it also reflects the limited opportunities for the development of banking business. The competitive landscape has shifted towards large private banks.
“Profitability of banks is going to increase as credit costs decrease.
The improvements will be universal and will help to smooth out a significant difference in the profitability of different groups of banks,” the report said.
According to Moody’s, the high level of dollarization of deposits will keep.
“Dollarization of deposits is consistently decreasing, but still remains the highest among the CIS countries. Liquidity in manats is improving thanks to the de-dollarization of liabilities across the banking system and state support,” Moody’s experts say.
According to Moody’s report, the government’s willingness to support the banking sector has increased, and with improved monetary and fiscal policies, the government is supporting not separate banks, but the entire banking sector.
