OREANDA-NEWS. Fitch Ratings says that Azerbaijani privately-owned banks' credit metrics are stable as the economy is on the positive side of economic cycle, benefiting from high oil prices and significant government spending. However, asset quality and performance may be prone to significant volatility through the cycle given banks' exposure to the potentially cyclical and structurally weak Azerbaijani economy.

Asset quality is the major risk, given growing retail credit risks (although these have been managed fairly well to date due to only moderate consumer indebtedness) and mostly long-term corporate lending, which is significantly exposed to project finance and construction activities, often with bullet repayments. Consequently, this is of untested quality.

Slow loan turnover increases the banks' liquidity risks, particularly in a stress-case scenario. As a mitigating factor, their customer funding is relatively sticky while non-deposit funding is mostly sourced from local state-controlled agencies.

The banks face emerging capital constraints due to lack of scale, fast loan growth, limited new equity injections from banks' private shareholders and only moderate profitability. The latter is somewhat stronger at the banks that focus on retail, micro and SME lending, due to higher margins and lower impairment charges.