For rate of credit growth, Azerbaijan is in highest-risk category

Credit growth is running at an 11 percent pace, making banking systems vulnerable to an increase in bad debts, Fitch said in a report yesterday. The weakness is more pronounced in developed countries, with Australia, Canada and Iran joining Iceland, Russia and Azerbaijan in the highest-risk category.

"We're finding conditions that in the past have been leading indicators of problems for the banking system," Richard Fox, an analyst at Fitch in London, said in a telephone interview. "There’s clearly a global credit boom taking place -- the longer it goes on the more stretched banking systems get."

Banking system stress is signaled when rapid lending growth is accompanied by "strong" increases in equity or property prices, or by the strength of the real exchange rate, Fitch said. Seventy percent of developed countries show "moderate" or "high" vulnerability to stress, compared with emerging nations where "only half" are potentially vulnerable, Fitch said.

Iceland, where private sector credit rose by more than 63 percent of gross domestic product last year, remains in the highest-risk category, along with South Africa, Russia and Azerbaijan. The four have been joined by Australia, Canada and Iran, Fitch said in its latest "Bank Systemic Risk" report.

Fitch also measures the strength of countries' banking systems to gauge their overall vulnerability. Strong banking systems, which are found in "almost all" developed countries, are better able to deal with adverse shocks, Fitch said.

"Developed countries in the high-risk categories are starting from a strong point," said Fox. "We're less concerned about them than about Russia, Kazakhstan and Azerbaijan, say."

Nine of the 10 fastest rates of growth in credit are to be found in central and eastern Europe and in the Confederation of Independent States, where banking systems are typically "weak" and less able to withstand stress, Fitch said.

The pace of credit growth in some countries where the ratio between lending and GDP is already high, such as Kazakhstan, the Baltic nations and Ukraine, is so fast "as to warrant special concern," Fitch said.

The quality of China's banking system has improved because of strengthened capitalization, a smaller number of non- performing loans and a strong economy. The improvement is good news for everyone, Fox said.

"The bigger the banking system and the weaker it is, the more we're concerned about it," he said. APA