'Non-performing loans in Azerbaijani banking system stabilized'

The level of non-performing loans (NPLs, 90 days overdue), estimated by Fitch based on a survey of rated banks, stabilized at a high 14 percent at end-2011, Fitch Ratings Deputy Director for Financial Institutions in the CIS Dmitry Abramov said at the presentation "Azerbaijan's banking system: recovery after crisis" today.

However, restructured/rolled-over exposures, equal to at least a further 11 percent of loans, suggest potential for additional future impairment recognition. In addition to deficiencies in the operating environment, asset quality has been undermined by often weak loan underwriting at banks. Increased competition for SME and retail borrowers also carries a risk of less stringent credit standards in this segment.

Against this background, Fitch considers the capital cushions of the majority of rated banks to be only moderate. Excluding IBA, the loss absorption capacity of Fitch rated banks (calculated as the maximum total amount of reserves that they could create without breaching minimum capital requirements) stood on average at around 12 percent of their aggregate loan books at end-2011.

The agency notes that weak internal capital generation (reflected in a sector return on average assets of 1 percent in 2011) is likely to persist on the back of more moderate growth, continuing recognition of credit impairment from legacy loans, tighter competition and the limited scale and high cost bases of many banks.

Fitch expects that, barring external shocks, the system will continue its slow recovery, supported by generally comfortable liquidity resulting from the fast growing retail deposit base. The loans/deposits ratio was still a high 1.5x at end-2011, although non-customer funding comes mainly from government agencies and international financial institutions, mitigating refinancing risks.

The Viability Ratings of Fitch-rated Azerbaijan banks are currently in the 'b' category or below, and the agency does not expect any marked upward movement in the medium term given weaknesses in the operating environment and the banking system.

Sector development is also undermined by the capital deficit of the International Bank of Azerbaijan (IBA), the country's largest bank accounting for nearly 35 percent of system assets.

IBA's Long-term Issuer Default Rating of 'BB+'/Rating Watch Negative continues to reflect the agency's base case expectation that the authorities will ultimately provide sufficient capital support for the bank.

In February 2012 the government announced a plan to recapitalize the IBA by providing a subordinated debt by 150 million manat and the new capital by 50 million manat, as well as holding an additional share issue worth 50 million manat to place among the existing minority shareholders.


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