17:51 - 4.07.2019

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July 4, Fineko/abc.az. International rating agency Standard & Poor's has published a report on problem loans in the CIS countries.

According to S&P’s report, consistently high level of problem assets remains one of the specific features of the banking systems of the CIS region. For example, over the past 10 years, the average level of problem loans in the banking sectors of Russia, Kazakhstan, Azerbaijan and Ukraine exceeded that of many emerging economies (particularly Brazil and South Africa).

"The level of problem loans is very different in various countries of the region. In particular, in 2011-18 the average level of problem loans in Georgia and Armenia made up 7.4% and 5.6%, respectively, and was steadily below 10%. More effective banking supervision and stronger governance practices in Georgia and Armenia have enabled banks to resolve their bad debt issues quite successfully, despite the high level of dollarization of their loan portfolios. The situation is quite different in Kazakhstan, Azerbaijan and Ukraine, where the level of problem loans remains extremely high," the report says.

According to S&P’s analysts, weak corporate governance practices, expressed, for example, related-party lending or fraudulent activity by the management, were widely spread in these countries.

"As for Azerbaijan, it observes quite high level of problem loans (which is at the peak level was about 65% of the loan portfolio in 2015) reflects the weak practices of risk management, fraud and excessively high level of foreign currency lending by the country's largest bank - the International Bank of Azerbaijan (IBA)," the report says.

According to agency’s report, many banks of the region will continue to form additional reserves for losses on accumulated problem loans. As a result, the profitability and capitalization of banks will remain under pressure in the next few years.

The Agency's experts think that the creation of new reserves under problem loans may lead to weakening of the capital adequacy ratio to a level below the minimum requirement of the regulator for separate banks, especially in countries with a high level of accumulated problem assets, such as Kazakhstan and Azerbaijan.