S&P forecasts moderate ROE decline for Azerbaijani banks through 2026

The return on equity (ROE) of Azerbaijan's banking sector will be 16 per cent in 2024-2026 against 17.7 per cent in 2023 and 16.2 per cent in 2022, according to an updated report from S&P Global Ratings.

The report, which assesses banking risk indicators for 85 banking systems, highlights trends in profitability and credit risk, Caliber.Az reports, referring to local media.

The expected return on assets (ROA) for Azerbaijani banks over the next three years is forecasted at 2.1%, slightly lower than the 2.2% observed in the previous two years. The loan-to-deposit ratio is anticipated to rise, reaching 105.1% in 2024, 110.7% in 2025, and 116.5% in 2026, compared to 100.9% in 2023 and 88.7% in 2022.

In its credit risk assessment, S&P analyzed the state of non-performing assets and projected credit losses for banks over the next three years.

The proportion of problematic loans in Azerbaijan's banking sector is expected to be 3% of the credit portfolio in 2024, increasing to 3.2% in 2025 and 3.4% in 2026. This marks a rise from 2.6% in 2023 and a decrease from 3.6% in 2022.

Credit losses are expected to average 1.2% of the credit portfolio from 2024 to 2026, up from 1.1% in 2023 and 1% in 2022.

Additionally, household debt as a percentage of GDP (Gross Domestic Product) is projected to reach 13.5% in 2024, 15.7% in 2025, and 17.5% in 2026, up from 8.4% in 2022 and 11.4% in 2023. The corporate debt share of GDP is forecasted at 9.1% this year, 10.2% next year, and 11% by 2026, increasing from 6.6% in 2022 and 8.1% in 2023.

The overall private sector debt as a percentage of GDP is expected to rise to 22.6% in 2024, 25.9% in 2025, and 28.5% in 2026. The private sector debt is anticipated to increase by 3.1% in 2024, 3.3% in 2025, and 2.5% in 2026, following a rise from 15.1% in 2022 to 19.5% in 2023.

Moreover, the report indicates that housing prices, adjusted for inflation, are expected to increase by 5.3% in 2024, 3.8% in 2025, and 3.4% in 2026, following declines of 5.3% and 0.9% in 2022 and 2023, respectively.

These insights underline the evolving landscape of banking risks in Azerbaijan, highlighting challenges and expectations for the sector in the coming years.

By Khagan Isayev