"We expect that the continued economic contraction in 2017, combined with weak credit demand and high inflation will contain Azerbaijani banks' lending growth," said Maria Malyukova, Assistant Vice President at Moody's.
Moody's forecasts the economy will shrink by 1% this year, following a severe recession in 2016, before returning to growth in 2018.
“Weak asset quality will further constrain banks' profitability and capital, after the level of problem loans (which include overdue and restructured loans) surged to 30% of gross loans at Moody's rated private banks at the end of 2016, from 16% in 2015. Problem loan levels will remain elevated given the adverse market conditions, borrowers' limited capacity to service their debt and their vulnerability to foreign-exchange risk", said Malyukova.
Current loan loss reserves are insufficient to cover all problem loans, exacerbating further provisioning needs.
Moody's expects most Azerbaijani banks to be loss-making again in 2017: “Capital buffers will remain under pressure from heightened credit losses and foreign-exchange risks. A further possible tightening of regulation could also require additional recapitalization by banks”.