The ability and willingness of the government of Azerbaijan to support the banking sector, in particular, the biggest banks, will remain strong, APA reports citing the Agency.
"Despite the stringent measures being taken by the government of Azerbaijan (Ba2 stable) to curb the spread of coronavirus, will undermine economic activity, the ability and willingness of the government of Azerbaijan to support the banking sector, in particular, the largest banks, will remain strong, given large reserves compared to the size of the banking system," the message said.
“The spread of coronavirus will disrupt economic activity and together with lower oil prices will erode the debt service capacity of households, small and medium-sized enterprises (SMEs), and corporates, leading to an increase in problem loans,” the message said. “Banks' profitability will weaken due to increases in provisioning charges and funding costs.”
“The share of foreign-currency loans in total loans still remains at 35 percent as of the end of 2019, which raises asset risks for borrowers,” the message said.
“Probability of government support to the largest banks remains high in Azerbaijan,” the message said. “With total reserves accumulated by State Oil Fund of Azerbaijan Republic (SOFAZ) amounting to about 90 percent of GDP at the end of 2019, the government is well positioned to provide support to the economy and the banking system, which is small, with total gross loans equalling 19 percent of GDP.”
“Therefore, in terms of an increase in problem loans and provisioning charges, the government has good capacity to provide support to the economy and SMEs,” the message said. “The sector’s reliance on wholesale market is limited while refinancing risks are relatively low. In addition, about 50 percent of banking sector assets are in liquid forms, which provide a strong cushion against external shocks.”