The banking system outlook has changed to negative from stable for Azerbaijan (Baa3 stable), said Moody's Investors Service, reflecting the impact of lower global oil prices and currency devaluation on the operating environment for banks, as well as on their asset quality, capital, profitability and funding.
The new report "Banking System Outlook: Azerbaijan", is now available on www.moodys.com.
Moody's notes that the slump in oil prices has put downward pressure on Azerbaijan's economy, given that the hydrocarbon sector accounted for close to 37% of nominal GDP at the year-end 2014. Moody's forecasts that Azerbaijan's GDP growth will slow to 1.0% in 2015, based on an assumption of oil prices averaging $55 per barrel this year, and that growth will
only recover to 1.7% in 2016.
Slower economic growth can be partially offset by government spending initiatives backed by a sizable pool of accumulated foreign-currency reserves (70% of GDP as of year-end 2014).
"Developments in the non-oil economy are the principal determinants for the banks' operating environment, and, as such, dictate the evolution of bank performance," said Maria Malyukova, a Moody's analyst and author of the report.
Moody's report says that alongside the weak operating conditions, the local-currency devaluation in February of this year is credit negative for banks.
"We believe that banks' asset quality will deteriorate following the local-currency devaluation, as most foreign-currency loans in Azerbaijan are to borrowers that do not have foreign-currency revenues. Moreover, higher inflation reducing consumer spending power and seasoning of banks' loan books amidst a slowdown in lending growth will also contribute to an increase in problem loans to not less than 15% of gross loans this year from 11.4% at the end of 2014," adds Ms. Malyukova.
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