Bank sector outlooks for the CIS and Georgia in 2018 are mostly stable, helped by a more supportive economic backdrop and steps to reduce asset quality pressure stemming from recessions and currency devaluations in recent years, Fitch Ratings says.
We maintain stable sector outlooks for Russia, Ukraine, Armenia, Georgia and Uzbekistan, where we do not expect significant deterioration of most banks' financial metrics. We have revised the sector outlooks for Kazakhstan and Belarus to stable from negative, as ongoing state and shareholder support is reducing risks from problem exposures. However, our sector outlook for Azerbaijan is still negative, due to continued asset quality pressure.
The economic environment should enable banks to improve performance, supported by the oil price recovery and currency stabilisation across the region. We expect economic growth in 2018 will strengthen in Russia, Ukraine, Kazakhstan, Belarus and Azerbaijan. Growth will slow but remain healthy in Georgia, Armenia and Uzbekistan.
The Russian banking sector recovery and clean-up will continue in 2018, with improved earnings from the strongest institutions and strong overall liquidity, although some lenders are having to pay high rates to retain deposits. Lenders with particularly low capital ratios or weak asset quality could face central bank intervention, potentially leading to further bank closures or resolutions. Recent experience suggests a reluctance on the part of the Central Bank of Russia to impose losses on senior creditors of systemically important banks, but we believe senior creditors at smaller troubled lenders are more exposed.
Ukraine's banking sector clean-up is well advanced, with high problem loans largely now recognised and banks supported by capital injections from the state or foreign shareholders. The sector should return to profitability in 2018 but provisioning, funding costs and limited growth will weigh on performance.
In Kazakhstan and Azerbaijan the authorities took important steps in 2017 to resolve large banks, with the completion of large bad loan buy-outs from Kazkommertsbank and International Bank of Azerbaijan. But many other lenders still need to increase provisioning for their large portfolios of restructured and foreign-currency loans. Some medium-sized banks in Kazakhstan have benefitted from state capital support to address this, but in Azerbaijan lenders often remain dependent on regulatory forbearance.
Banking sector rating outlooks are positive in Russia and Belarus, and stable in Ukraine and Uzbekistan, reflecting Outlooks on sovereign ratings/credit profiles, to which many bank ratings are linked. The stable outlooks in Georgia, Armenia, Kazakhstan are driven by expected trends in bank fundamentals, as bank ratings in these markets are less tied to the sovereign, and the stable outlook in Azerbaijan reflects the already low levels of banks' ratings.