Azerbaijan’s banking industry is demonstrating signs of recovery from protracted correction, supported by favorable commodity prices stimulating active credit demand along with material improvement in asset quality, Report informs referring to the Azerbaijani banking sector’s study of the international rating agency S&P Global Ratings.
“We believe the Azerbaijani banking sector has shown better resilience to macroeconomic challenges over the recent years, with credit costs and nonperforming loans (NPLs) in the system remaining significantly below our earlier expectations.
Banks’ asset quality metrics demonstrate sustainable improvement to historically low levels of NPLs and credit costs and we believe the banking sector successfully navigated a difficult 2020, economic slowdown, and lower oil prices,” S&P noted.
Nonperforming loans could moderately deteriorate to about 4%-5% in 2022, versus 3.5% officially reported at midyear 2022.
“We consider this manageable for the system. We expect Azeri banks' lending will continue to rebound in 2022-2023, with about 15% annual growth. In our base-case scenario, we forecast credit costs will remain elevated in and beyond 2022, reflecting aftershocks, mainly owing to reduced real disposable income of households and small and midsize enterprises on the back of higher inflation.
At the same time, we believe that credit losses in 2022-2023 likely will remain within 0.5%-1% of average loan books, which is still well below their historical cyclical level. Indeed, household and corporate indebtedness constituted 9% of GDP each at year-end 2021, which is lower than in peer countries,” reads the study.
After several years of stagnation, S&P expects rebounding lending activity in 2022-2023. The overall loan book grew by 17.8% in 2021 and by 11% over January-July 2022. It’s likely that growth will stabilize at 15%-17% for the whole of 2022 and continue at a similar pace in 2023. Retail lending increased by 28% in 2021 and 17% in the seven months of 2022.
“Rising concerns regarding geopolitical risks and economic challenges in the region could affect the sustainability of improvements in credit risk and the risk appetite of banks in Azerbaijan, while regulatory enhancements will be tested as banks actively expand their lending books. We expect some banks will be more affected than others, depending on their exposures to the most vulnerable segments and industries and depending on their capacity to handle potential shocks,” S&P added.
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