Moody's expects significant decline in number of banks in Azerbaijan

Business Materials 9 August 2012 15:25

Azerbaijan, Baku, Aug.9 /Trend A.Akhundov/

International rating agency Moody's Investors Service expects a significant decline in the number of participants in the banking system of Azerbaijan.

Last Friday, the Central Bank of Azerbaijan (CBA) announced that it will raise the minimum capital thresholds for banks operating in Azerbaijan to 50 million manat ($63.7 million) as of 1 January 2014 from the current 10 million manat ($12.7 million).

"The measure, which will affect existing and new banks, is credit positive for the Azerbaijan banking sector because it will foster consolidation, leading to increased competition for larger banks," the agency said on Thursday.

Moody's doesn't expect the new measure to significantly boost the banking system's capitalization because it believes that very few smaller banks will be able to secure capital injections from their shareholders, and most banks will opt for consolidation or liquidation instead.

"Because these smaller banks are generally weak institutions, their consolidation or liquidation will improve the stability of the banking system of Azerbaijan," the agency said.

Based on year-end 2011 capital levels, only 11 of the system's 43 banks had sufficient capital to meet the new requirements. Those 11 banks are only 25 percent of all banks operating in Azerbaijan, but they hold more than 70 percent of total banking assets.

"Among the other 32 banks, which had less than 50 million manat of capital, we estimate that only 13 medium size banks (21 percent of banking system assets) will be able to meet the new capital requirements via internal capital generation and capital injections from their shareholders or by consolidating. As a result, the new requirements will likely encourage most of those banks to consolidate, creating stronger financial institutions that will be in a better position to compete with large banks," the statement said.

The remaining 19 small banks, which comprised only 6 percent of total system's assets at year-end 2011, will find it difficult to raise additional capital via consolidation or external capital contribution, the agency believes.

"As a result, we expect them to be liquidated if they are not acquired by larger banks. Liquidation of small banks would result in a more stable banking system since they are generally non-transparent financial institutions with weak financial fundamentals, high risk-taking, high shares of related-party lending and limited franchises," the statement said.