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Fitch: CIS Bank Sector Outlooks Diverge on Economies, Currencies

December 12, 2016 | Cbonds

Sector outlooks for CIS and Georgian banks for 2017 are diverging, reflecting how far recent recessions and currency devaluations will continue to affect lender performance, Fitch Ratings says.

Our sector outlooks are now stable in Russia, Armenia and Ukraine, where we do not expect further significant weakening of banks' financial metrics. Sector outlooks in Kazakhstan, Azerbaijan and Belarus remain negative. These countries have experienced sharp currency depreciations and foreign-currency (FC) lending is high, while regulators have yet to fully quantify asset-quality risks and promote recapitalisation. Outlooks in Georgia and Uzbekistan remain Stable.

Russian banks' sector outlook mirrors the stabilisation in the Russian economy and the rouble. Most banks' pre-impairment profit should be enough to reserve problem loans without hitting capital, although bottom-line earnings will be muted at most banks and lending growth will be limited. The central bank will take steps to absorb excess rouble liquidity, while FC liquidity will remain sound and sufficient to allow banks and corporate borrowers to meet external debt repayments.

We expect Ukrainian banks' financial metrics to stabilise at weak levels. The regulator's asset-quality review has reduced the potential for negative shocks, but large provisioning, and hence capital, shortfalls mean bank recapitalisation plans and regulatory forbearance on capital levels remain important drivers of the sector outlook. Liquidity has stabilised with deposit flows and the restructuring (maturity extensions) of bank Eurobonds.

Kazakh banks' liquidity profiles are robust, but capitalisation is vulnerable (with the exception of Halyk Bank) considering moderate provisions on distressed loans, risks from FC lending and the failure to clean up balance sheets. Potential resolution measures are unclear ahead of the National Bank of Kazakhstan's planned asset-quality review, now scheduled for the end of 2017.

Azerbaijan's banks face capital and liquidity pressures from currency mismatches and asset-quality deterioration in heavily dollarised loan books. Material capital shortfalls and large losses mean we expect further bank failures and clean-up measures next year. However, substantial state support for International Bank of Azerbaijan remains in place and we expect the clean-up of the bank's balance sheet to be completed next year.

Rating Outlooks in the region are mostly Stable, as ratings are already low, performance and financial metrics in some markets are stabilising and most sovereign Outlooks are Stable. The Negative Outlook in Azerbaijan reflects a combination of deteriorating bank profiles and the Negative Outlook on the sovereign rating.


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