S&P affirms ratings on two Azerbaijani banks

At the same time, S&P affirmed its 'BB-/B' long- and short-term counterparty credit ratings on PASHA Bank. The outlook remains stable.

The  rating actions follow the revision of S&P's outlook on Azerbaijan to negative from stable.

S&P said: "In our opinion, economic risks for Azerbaijani banks have increased because of the slowdown of the domestic economy, due to the pronounced drop in

international oil prices and sharp devaluation of the manat in early 2015. As a result, under our methodology for banking industry and country risk, we now view the economic risk trend in Azerbaijan as negative, rather than stable. This reflects our opinion of increasing challenges that could constrain domestic banks' business growth and earnings prospects.

"Azerbaijan's economy and general government revenues depend on the hydrocarbons sector, which we estimate contributed about 44% of GDP and 95% of

merchandise exports in 2013-2014. We have recently significantly lowered our expectations on oil prices for 2015-2018. We now forecast that the oil price will decrease to $55 per barrel in 2015 and modestly recover to an average $75 per barrel in 2016-2018. In 2015, we anticipate that the economy will expand by only 1.9%, down from 2.8% in 2014, because oil production and exports will continue to shrink, and the non-oil sector, especially construction, will be affected by lower public-sector capital investment. 

"We expect nominal GDP, on the other hand, to contract by more than 10% this year, due to the sharply lower oil prices. A prolonged drop in oil prices may test the government's ability to maintain its spending initiatives, in our view. This could put additional pressure on banks' financial fundamentals if asset quality deteriorates because of borrowers' reducing debt-servicing capacity.

"Credit risk in the economy is extremely high, in our opinion. Recent rapid growth in household and corporate debt is exacerbating the risk of weaker economic prospects, despite low leverage metrics in a global context. Over the past few years, lending in foreign currency has fallen gradually, due to the stability of the local currency. At the same time, owing to the large parallel economy, it's difficult to assess debt-servicing capabilities and therefore the true level of problem loans; the domestic regulators have reported that nonperforming loans represented 5.5% of system loans as of Sept. 30, 2014. Given Azerbaijan's commodity-led economy and the substantial drop in oil prices in 2014, we believe that these factors may erode banks' asset quality."