Azerbaijan, Baku, May 11 /Trend I.Khalilova/
The gradual process of consolidation in the banking sector in Azerbaijan is inevitable, associate director of the banking analytical group Fitch Ratings Dmitry Abramov said.
"Business is usually built around the maintenance of shareholder interests at small banks which together with the small size of operations raises the question of their economic viability," Abramov told Trend on Friday.
Abramov noted that the relationship between the processes of consolidation and asset quality is quite remote. However, consolidation of banks has several advantages.
First, the increase in activity can improve the efficiency of the bank to improve the ratio of operating expenses and income from banking activities.
"This in turn creates the preconditions for the reduction of borrowing costs and increase access to credit for borrowers," Abramov says.
On the other hand, banks receive the necessary margin to overcome the temporary difficulties that can arise with any deterioration in market conditions, while increasing the operating efficiency of banks.
Secondly, larger banks tend to have more opportunities to create sustainable patterns of funding due to a significant amount of internal computational speed, attractiveness to retail investors and a greater likelihood of government support in case of systemic stress. In addition there is an opportunity to diversify its funding through access to international capital markets.
According to Abramov, the consolidated banking system does, of course, create the preconditions for more effective oversight. However, the consolidation of banks is not a priority issue the Central Bank of Azerbaijan faced at the moment.
"In our view a more urgent task may be the creation of system tools to support liquidity and as we understand it, the Central Bank aims to address this issue," Abramov said.
Creation of an effective mechanism for liquidity management will require the development of infrastructure and depth of the securities market, increase of volumes and instruments of the repo market and support of the interbank market as well as system procedures to provide emergency support in the event of market stress.
In addition, the representative of the agency notes the importance of purposeful improvement of the standards of risk management in banks (in particular, reducing reliance of credit transactions on a volatile real estate market), as well as increasing the transparency of the banking sector including the disclosure of the ultimate beneficiaries of banks and strengthening of control over transactions with related parties.
In general, Abramov did not see the solution of problems of the banking sector in the country, in terms of improving the quality of bank assets, in the consolidation of banks through the consolidation of healthy assets. He said Azerbaijan is roughly comparable to other CIS countries by the number of banks at the moment (44), particularly to Belarus, Kazakhstan and Uzbekistan. CBA chairman Elman Rustamov said the central bank will start concrete negotiations on consolidation in the banking sector after the summer.
He said the Central Bank is interested in consolidation of the country's banking system.
"We as a government are interested in this as the union of a group of relatively weak banks will result in consolidation of capital and the increase in resources will provide a transition to a qualitatively different level of customer base, technology used, corporate governance," Rustamov said.
A strategy of consolidation and optimisation of the banking sector developed by the CBA involves a reduction the number of banks in Azerbaijan from 44 to 20 in the long run.
In practice, the national banking system already has a successful practice of consolidation of banks with the participation of EBRD. The present UniBank was formed through the merger of two commercial banks - MBank and Promtexbank in 2002, where the EBRD bought a 15 per cent stake. Following this a merger of the Bank of Baku and IlkBank took place in 2005.