Fitch: Liquidity quality in Azerbaijani banks one of strongest in CIS+ region

At the end of 2023, the quality of liquidity in Azerbaijan’s banking sector was one of the strongest in the CIS+ region and the loan-to-deposit ratio was 60%, while in Armenia and Georgia last year the deposit portfolio remained stable after a significant influx of non-residents in 2022, and the sector loans/deposits ratios were 90-100%, Report informs referring to the international rating agency Fitch Ratings.

“Banks in the Caucasus region are benefitting from positive credit trends driven by favorable operating environments given strengthening sovereign credit profiles and rapid economic growth. Improved revenue generation, increased business volumes and credit metrics above historical averages have driven several positive rating actions in recent years.

Many banks in the Caucasus region (Armenia, Azerbaijan and Georgia) reported record-high performance in 2022-2023, and we expect it to remain strong. The profitability was underpinned by wider interest margins, which increased by 1pp-2pp across these markets, driven by higher interest rates on assets coupled with low funding costs due to abundant liquidity. Banks in Armenia, and to a lesser extent in Georgia, also benefitted from a boost in revenues from immigration and money inflows from Russia. Azerbaijani banks’ performance has been supported by higher oil prices and the easing of legacy asset-quality risks,” reads the report.

“In Armenia and Georgia, capital ratios are high, propped up by profitability above historical averages. In Azerbaijan, rapid loan growth and material dividend pay-outs weigh on capital ratios but we still expect capitalization to remain reasonable in light of strong profitability.

Favorable macroeconomic conditions and healthy lending growth are supporting steady improvements in loan-quality metrics across the region. The positive dynamics are particularly pronounced in Azerbaijan, where banks have seen a considerable moderation of legacy risks. This has been helped by a shift from concentrated and dollarized corporate exposures towards more granular, local-currency retail, micro and SME lending, and better regulatory supervision,” Fitch noted.

“Bank de-dollarization across the region has been supported by growth in retail lending and local-currency resilience in recent years. That said, dollarization is still high in Georgia (45% of loans at end-2023) and Armenia (36%), and remains a key asset-quality weakness for banks in both countries.

There has been positive rating momentum on banks across the region in recent years. We upgraded Armenian banks, reflecting significantly improved credit metrics, and expect metrics to outperform historical norms in 2024-2025. In Azerbaijan and Georgia, a few banks are on Positive Outlooks, signaling upside potential,” reads the report.