S&P views the trend for economic risk as stable rather than negative, owing to stabilization of major macroeconomic metrics, S&P Global Ratings reported.
‘Although the financial system remains relatively weak, we believe it will gradually recover in tandem with improved growth. At the same time, we still think that Azerbaijan's economy remains in a correction phase, with a high impact on its banking sector. This can be seen in elevated credit costs and nonperforming loans (NPLs) on Azeri banks' balance sheets. We expect bank lending to demonstrate anemic or even negative growth over 2018. This year, NPLs (including restructured loans) will likely peak to 23%-25% of systemwide loans, with restructured loans accounting for about one-third of that amount’, the agency said.
The agency thinks that although the banking system has a relatively high level of core customer deposits and no net reliance on external funding, steep manat devaluation over the last few years has led to protracted currency mismatches between banks' assets and liabilities: ‘This is due to a rapidly increased share of foreign currency funding, to more than 70% of customer deposits at the end of 2016, due to the conversion of deposits into foreign currency as a result of manat depreciation. Although this share subsequently reduced to about 65% in 2017, we still view persisting currency mismatches as high risk’.