Fitch: Azerbaijan's governance quality, banking sector ratings improve

Azerbaijan has improved its position by 15 percentage points compared to 2010 in the latest edition of the Worldwide Governance Indicators (WGI), Fitch Ratings’ EMEA Sovereign Ratings Director Arvind Ramakrishnan said.

According to him, governance quality—long considered one of Azerbaijan’s weakest areas—has risen by about 4 percentile points in the latest WGI report, Caliber.Az reports, citing local media.

“At first glance, this may seem modest, but in the long term, since 2010, the country’s score has increased by roughly 15 points—to the 38th percentile—while the global median has remained unchanged. Clearly, there is still a long way to go, especially in areas such as voting rights and accountability, as well as clarifying the mandates of certain institutions. Nevertheless, we believe the overall development trajectory is likely positive,” Ramakrishnan said.

He also noted that Azerbaijan has very high financing flexibility and a significantly improved regulatory framework, although more work is still needed in this area.

Ramakrishnan pointed out that there remains insufficient clarity regarding some mandates, particularly in defining the roles between the State Oil Fund of Azerbaijan and the Central Bank. Because of this, Fitch applies a “minus one notch” adjustment to Azerbaijan’s sovereign rating macroeconomic block, which balances out two positive notches in public finance and external finance, he said.

At the same time, Ramakrishnan emphasised that the country’s extremely low public debt is a clear advantage for its sovereign rating.

“The economy is moving toward diversification, but there is still significant work ahead. As for governance quality, it remains weaker compared with comparable BBB-rated countries, but improvements have been observed in recent years,” he added.

Speaking about Azerbaijan’s banking sector during a webinar, Fitch Ratings’ Senior Director for Banks, Maxim Malyutin, said the sector is now significantly more resilient than in the pre-COVID period.

He said the sector has become more profitable, adequately capitalised, with improved risk-management systems and a more diversified funding base. “These factors support the financial stability of banks even amid slower economic growth,” he said.

Malyutin noted that strengthened supervision of asset quality has led to sustained improvement in key indicators in recent years.

“Microprudential tools are becoming increasingly effective in cooling the retail segment. Key asset quality indicators have been at historical lows for the third consecutive year and are expected to remain moderate despite slight pressure this year. We expect the share of Stage 3 loans in the sector to rise to around 4.5% by year-end, up from about 3.5% last year, while Stage 2 loans are expected to remain broadly stable,” Malyutin said.

He added that although retail lending penetration remains low in Azerbaijan, the ratio of household debt to disposable income approached 20% last year, compared to 12% six years ago.

“We consider this level still manageable. However, the share of loans to borrowers with a debt-to-income ratio (DTI) above 45% remains persistently high at around 40% of the retail portfolio. Local banks continue to generate high pre-provision profits. Net interest margin remains wide at around 7%, although it is expected to narrow amid slower lending and higher funding costs,” he added.

By Khagan Isayev