Fitch: Capitalization - the Main Issue for Banks in Azerbaijan

Fitch Ratings notes that the cap has become a major issue for many banks in Azerbaijan due to the rapid growth in assets, generating a weak internal capital and more stringent regulatory requirements. Asset quality and liquidity are stable, but rates as the economy in general and the banking sector remain highly dependent on oil prices.

Fitch considers the current capitalization as moderate (cumulative total capitalization of the sector was 16.7% at the end of 2012) with the still high level of loan impairment and moderate coverage ratio. According to the agency, 100 per cent reservation for problem loans would reduce the capitalization of the sector to a minimum level of 12%. In addition, the capital (and asset quality problems) is unevenly distributed in the country's banking sector. Thus, the three major banks (which together account for 44% of sector assets) at the end of 2012 has marked figures are very close to 12% or below.

Smaller banks seem to be less prepared to increase from January 2014 the absolute minimum acceptable level of regulatory capital to 50 million manat. At the end of 2012, only 12 banks in the sector are already compatible with the new requirement, and another seven financial institutions capital of over 35 million manats, that is, they require only modest capital in order to fulfill the new requirement by the end of 2013 of the remaining 24 banks ( whom he took more than 700 million manat to comply with the new standards) will be required higher contributions of capital, and will have to consider a possible merger or reorganization in non-banking credit organizations.

Profitability in the sector as a whole is weak. Thus, the return on average equity was estimated to be only 8% in 2012 due to low margins, unresolved problems with the quality of assets and the reduction of activity in most of the private banks. Fitch expects that these factors will continue to affect the profitability of the sector in 2013, which means that the generation of internal capital is likely to go much more slowly than the still rapid credit growth (which is forecast to Fitch, will remain on the level of 20% -25% in 2013).

Asset quality has stabilized, supported by favorable macroeconomic conditions, but analysis of banks rated by Fitch, still showed the (weighted) average non-performing loans at 13% at the end of 2012 and the same amount of restructured loans. Fitch expects that the economy will remain favorable factor in 2013, with growth of non-oil GDP, projected to be 10% on budget expenditures. However, long periods of corporate loans (often in combination with a grace period) indicate that a substantial part of the quality of loans is largely not yet passed the test of time. Strong growth in consumer lending (more than 50% in 2012) is also a source of risk, although the total debt burden of the population today remains moderate, and under favorable economic conditions, income should continue to increase.

Funding and liquidity in the sector supported by expansionary fiscal policy and currency purchase by the Central Bank, designed to maintain the exchange rate. Growth in retail deposits was a significant (24% in 2012), while consumer confidence in the banking sector is still fragile, as reflected in the preservation of large volumes of transactions outside the system. Emphasizing the limited intermediation sector, the state remains an important source of funding (25% of total liabilities at the end of the sector in 2012), mainly provided for lending. Foreign borrowings made significant commitments of 20%, which was equal to a moderate 8% of foreign exchange reserves of the state, and more than half of this amount was provided by borrowings is in the majority state-owned International Bank of Azerbaijan ("IBA" rating "BB" / forecast "Stable").

Sustainability ratings of Azerbaijani banks are concentrated in the category of "b" (or lower) and remain constrained operating environment disabilities in general (including potential economic cycles, poor transparency in the corporate sector and the low quality of governance indicators by the World Bank) and their own customer bases , quality control and performance. Ratings of most of the banks do not reflect the potential benefits of external support with the considerable uncertainty about the willingness of the authorities to provide capital support in case of need, in particular after the delayed and limited recapitalization IBA. "Stable" outlook on most banks reflects Fitch's expectation for the baseline scenario on the preservation of a strong growth in non-oil economy in the near future, which should continue to maintain asset quality and liquidity in the sector. - 15D -