Azerbaijan’s banking sector on mend: S&P Global Ratings provides insight

By Ulviyya Shahin

Azerbaijan’s banking sector is demonstrating significant signs of recovery, according to the latest report by S&P Global Ratings. After a prolonged period of correction and adjustment, the sector is rebounding, bolstered by favorable economic conditions and strategic improvements.

The S&P Global Ratings report highlights that the recovery of Azerbaijan’s banking system has been primarily driven by rising commodity prices. This upward trend has stimulated increased credit demand, which in turn has improved asset quality within the banking sector. The positive impact of commodity prices underscores the sector's responsiveness to global economic trends, which has enhanced its financial stability.

Looking ahead, the banking sector is projected to continue its recovery with strong lending activities anticipated through the period from 2021 to 2023. This ongoing recovery is supported by new credit growth, particularly in the retail sector, alongside a normalization of risk costs and effective cost management practices.

S&P Global Ratings forecasts a stable profitability outlook for Azerbaijan's banking sector. The expected return on equity (RoAA) for 2024-2025 is projected to be 2.1%, maintaining levels consistent with those observed in 2023. This stability in profitability is attributed to the continued expansion of credit, especially in retail lending, alongside prudent cost management and risk control measures.

This forecast indicates a solid foundation for the sector, suggesting that financial institutions are well-positioned to navigate the evolving economic landscape. The focus on retail credit is particularly noteworthy, as it reflects a strategic shift towards more stable and diversified sources of revenue.

Despite the positive outlook, S&P Global Ratings also anticipates some challenges on the horizon. The report predicts a slight deterioration in asset quality, with the proportion of problem loans expected to rise from 2.7% at the end of April 2024 to 3.5% over the next 24 months. This anticipated increase in problem loans is linked to slower loan portfolio growth compared to previous years and the need for additional reserve provisions.

The slower growth in the loan portfolio, projected at 13% for 2024-2025 compared to 18% in 2023, reflects a more cautious lending environment. This moderation in growth, coupled with the need for additional reserves, underscores the importance of careful risk management and regulatory oversight to mitigate potential challenges.

Loan losses are expected to remain stable at 1.0%-1.2% of the portfolio, indicating that while asset quality may face some pressures, the sector is expected to manage these challenges without significant volatility.

Azerbaijan’s banking sector is on a recovery path, supported by favorable economic conditions and strategic improvements. While profitability is projected to remain stable and lending activities robust, there are anticipated challenges related to asset quality and slower loan growth. The sector’s ability to navigate these challenges will be crucial in maintaining its positive trajectory and ensuring continued financial stability.

As the sector continues to recover, it will be important for banks and regulators to focus on effective risk management and adaptive strategies to sustain growth and stability in the coming years.