Azerbaijani banks will benefit from an improving operating environment which is underpinned by stronger economic activity and a stable currency, thanks to high oil prices that are providing sufficient volumes of foreign currency inflows, Report informs, citing Moody’s Investors Service.

Moody’s expects that the operating environment for Azerbaijani banks will improve in the next 12-18 months, as reflected by the upgrade of Azerbaijan’s sovereign rating.

“After having demonstrated resilience throughout the coronavirus pandemic – resulting in a smaller recession than peers and maintaining a stable currency – Azerbaijan is weathering the Russia/Ukraine crisis with a strong economic recovery bolstered by high hydrocarbon prices,” the agency says.

Despite Azerbaijan’s strong trade links to Russia, the conflict has had limited impact on the economy, and Moody’s expects Azerbaijan’s real GDP to expand 4% this year.

The stable outlooks of the long-term ratings reflect Moody’s expectations that the financial performance of the affected banks will remain resilient.

“Azerbaijani banks’ nonperforming loans ratio improved to 4.7% at year-end 2021 from 9.4% as of end of 2019,” reads the agency’s report.

Moody’s expects the current high oil prices and stronger economic output to support banks’ asset quality in the next 12-18 months. Consequently, the rating agency expects the banks’ nonperforming loans ratio to remain stable, with limited downside risk.

“Higher oil prices tend to have a generalised positive impact on Azerbaijan’s economy while improved foreign currency liquidity will support the stability of the manat, the local currency, supporting repayment capacity of foreign currency denominated borrowers,” the agency says.