Fitch Ratings: Consumer lending in Azerbaijan 5 times ahead of household income

The international agency Fitch Ratings in the last year registered growth in retail lending in the banking sector of Azerbaijan to compensate for inherited problems with impaired loans in the corporate portfolio and to improve the return on capital due to higher margins.

According to (http://www.fitchratings.ru/ru/rws/press-release.html?report_id=822870),  growth in retail lending (44% in 2013 ) is much higher than the growth of nominal income households ( 8 % in 2013 ) , which leads to a rapid increase in the debt burden of the population. However, Fitch believes that the current quality of the retail lending is acceptable and there is some margin for further growth with still moderate level of penetration of loans (the ratio of retail loans to GDP was only 11% at the end of 2013) and the potential influx of people still underserved by the banking system.

Meanwhile corporate lending market is close to saturation, as indicated by the lack of good quality borrowers. Growth in corporate lending was 15% in 2013 after increasing 25% in 2012.

But the quality of corporate credit portfolios weak due to limited financial transparency majority of Azerbaijani companies and disadvantages of the business climate in the country as a whole. Affect the situation and long maturities, considerable grace periods, which makes the portfolios of banks rather immature and reduces the liquidity of banks' balance sheets. Furthermore, there are significant risks of most banks for loans to infrastructure and construction sector, where the unfinished projects represent considerable risk.

According to analysts of the agency, the banking sector of Azerbaijan now generally stable and supported by appropriate indicators of the economy, which is now in the positive phase of the cycle. At the same time structural issues continue to affect asset quality, profitability and capitalization of the sector.

Asset quality indicators point to improvement in delinquencies on loans, because, according to a study by Fitch rated banks, loans overdue by 90 days decreased to 9.6 % at the end of 2013 compared to 13.1 % at the end of 2012.

At the same time, Fitch believes that asset quality is somewhat weaker than the numbers indicates in the reports, in view of ( 1) unseasoned new corporate lending , (2) potentially significant restructured loans and other assets from prior periods for some banks , as well as ( 3) the lack of redundancy in several banks.

Capital ratios improved, and total capital adequacy ratio of the banking system reached 18% at the end of 2013, as some of the larger banks have significant capital contributions from shareholders in 2013.

At the same time, Fitch considers capitalization of the sector as moderate in the context of (i) the commitment is not significant problem loans (about 45% of equity at the end of 2013 ), (ii) moderate capacity to cover additional losses , especially in smaller private banks and (iii) a weak ability to generate capital through earnings. At the last index affected by the problems in the area of ??operating efficiency , a significant proportion of low- income policy lending and volatile enough charge for loan impairment.

Funding remains stable and is supported by sustainable public funding (24 % of total liabilities of the banking system) and the growing deposit base. Foreign funding is significant at 19 % of its liabilities, but it was a moderate 12 % of foreign exchange reserves of the state and is mainly concentrated in the International Bank of Azerbaijan (BB / Stable forecast). Banks maintain acceptable liquidity reserve on the balance sheets, but in the case of liquidity stress may be vulnerable due to the slow amortization of loan portfolios. - 17D-