Our Analytics 26 july — 15:43

World has noticed Azerbaijan's success: Banks rise from the ashes (Topical comment)



Finance Minister Samir Sharifov, who had previously openly expressed dissatisfaction with the position of international rating agencies that had been stubbornly ignoring the success of the Azerbaijani economy after the mid-decade crisis, had not long to wait. The international rating agency Moody's has raised the outlook on the banking system of Azerbaijan from 'stable' to 'positive.' However, so far progress has been achieved only in the banking sector, although the minister was referring to the economy as a whole. But as they say in these matters it is the first step that counts.

Now Samir Sharifov can be satisfied

The country's banking system, which local experts unequivocally noted as a link hindering the entire economy, had to listen to criticism for a long time. By the way, recently, another reputable rating agency Fitch Ratings stated that the country's banking sector is the weak link. But, apparently, as time goes on, the situation is changing, and the banks of Azerbaijan are gaining strength to pull the country's economy. After all, the forecast reflects the agency's expectations as to how the creditworthiness of banks in our banking system will change during the forecast period of 12-18 months. What gives Moody's grounds to raise the banking sector's forecast by one notch over the next year and a half?

Continuing economic growth and the unprecedented support of households by the state are the main factors that influenced the assignment of a 'positive' forecast to the banking sector of Azerbaijan. The agency, like many international structures, expects acceleration of economic growth in the country to 3% in 2019-2020, taking into account favourable world prices for energy carriers, export growth and increasing the share of non-oil sectors in the structure of the economy. Government reforms should have a positive effect on the growth of the country's economy. Although the economy as a whole remains vulnerable to changes in oil prices, the positive changes that are taking place do not go unnoticed.

Moody's noticed positive trend

But back to the banks. Moody's expects to further improve the quality of banking assets due to clearing the balance sheets of banks and the support of households by the state. It is considered here that by the end of 2020 the share of problem loans should fall below 10%. And the agency's baseline scenario suggests that the capital adequacy ratio of the banking system as a whole will be stable due to the increase in banks' profits and the growth of risk-weighted assets. As for the dollarisation of deposits, it is consistently declining, although it still remains the highest among the CIS countries. But liquidity in manats is improved due to de-dollarisation of liabilities throughout the banking system and government support. And, interestingly, Moody’s notes that with the improvement of monetary and fiscal policy, the government now supports not the individual banks, but the entire banking sector. And this gives the agency grounds to believe that by the end of 2020 the share of problem loans in this sector of the country will fall below 10%.

Moody's has given an important place in its review of the banking system of Azerbaijan to the consolidation of the banking sector, which, in its view, will continue. The reduction in the number of banks in the country was the result of financial difficulties experienced, it also reflects the limited opportunities for the development of banking business. Today, the competitive landscape has shifted towards large private banks. Thus, the market positions of the largest banks, in particular, Pasha Bank, Kapital Bank and Xalq Bank, strengthened. This was due to the desire to improve the quality of service against the background of the closure of 15 banks in recent years, the financial rehabilitation of the International Bank of Azerbaijan (IBA) and the reduction in the share of borrowed funds by small banks.

The four mentioned largest banks in the country have been operating with a profit since 2017, and as for the IBA, it altogether reported the highest incomes before tax due to measures in the framework of state support, which Azeri Daily wrote about earlier. These banks generate the bulk of the profits of the sector. The rest of the banking sector (there are 30 banks in total in the country) remains unprofitable, at least since 2016, which leads to constant pressure on capital, limited asset growth and a widening gap from the largest banks.

In addition, smaller banks typically have a weaker market impact, limited access to the largest corporations and their employees, which pushes them to target higher-risk customers, in particular SMEs, entrepreneurs, and retail customers. But Moody's believes that the profitability of banks will increase as credit costs decline. Moreover, the improvements will be universal and will help smooth a significant difference in the profitability of different groups of banks. And healthy banks always evidence a healthy economy.

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