Moderate growth rates of banking indicators from early 2010 confirm the caution of the banking system in the context of the ongoing global financial and economic crisis. Noteworthy is that today the national banks do not feel the need for support from the Central Bank. In the context of low inflation, for population it is more profitable to invest their free resources in the deposit than in any business. As a result, banks are now engaged in attracting deposits and the high interest on them and the problems of banks in the placement of attracted funds even leads to excess liquidity in some banks.
Meanwhile, the Central Bank of Azerbaijan has already sent the next "message" to the banking sector about the preparations for post-crisis period.
International Finance Corporation (IFC) under the project on response of financial markets to crises plans to sign an agreement with the Central Bank of Azerbaijan (CBA) to help the banking sector of the country, Azer Aliyev, the coordinator of the IFC project in Azerbaijan said.
"In the near future we plan to sign an agreement with the CBA to support not only a certain group of banks, but the entire banking sector," Aliyev said.
According to him, within the agreement it is planned to create a joint working group. The main purpose of the agreement lies in the analysis of overdue loans of banks and improvement the management control system.
At present, under the project diagnosis of two banks - AGBank, DemirBank is held and it is planned to conclude an agreement with Turan Bank. DemirBank joined the project not long ago, and cooperation with AGBank continues for a year.
Analysis of banks is held at the expense of their funds. However it's possible to provide technical assistance of IFC for funding to 50 percent.
The project's purposes are:
- Providing assistance to financial institutions in the sphere of assessment and definition of the number of critical risks and internal weaknesses that threaten their stability in crisis;
- Support of some agencies in initiating immediate actions to accelerate the recovery process;
- Impact on strengthening the overall financial infrastructure by providing information and raising awareness of best practice;
- Analysis of the regulatory framework relating to the transfer and sale of assets.
The project covers three main areas of support to financial institutions:
- Monitoring of credit portfolio / management overdue loans. The project implements the best practices for managing bad assets to support the promotion of new loans;
- risk management, which includes capital sufficiency, liquidity, asset and liability management, operational, market and credit risks;
-problem assets. In order to clear the balance of financial institutions and allow them to focus on new loans, the preparation and assessment of a portfolio of partners for the sale or transfer will be supported within the project
IFC experts develop a comprehensive consultative plan based on diagnostic results and help leadership of financial institutions in the implementation of the agreed modules.
Now the central bank is developing a new regulatory framework in three areas - management of capital adequacy, liquidity management and financial reserve. Under the existing legislation, regulatory requirements for capital adequacy hit 12 percent and liquidity co-efficincy was defined as 30 percent. The minimum capital for existing and newly established banks is 10 million manat.
The level of capital adequacy of Azerbaijani banks hits 19-20 percent compared to a standard of 12 percent, Chairman of the Board of the Central Bank of Azerbaijan (CBA) Elman Rustamov said today.
"Stress tests conducted by CBA showed that the banking sector is at a fairly steady level. The banking sector has a level of capital adequacy, exceeding the standards of the CBA by about eight percent", Rustamov said.
He said that today business - organizations have unpaid debts to Azerbaijani banks, which affects the quality of their loan portfolios negatively.
Rustamov said that one of the positive trends of the banking market in the country is a significant reduction in interest rates, as well as dynamic growth of this index, as public deposits.
The share of problem loans in total loan portfolio is about 4 percent (as of May 1 - 4.2 percent) and non-standard debt - 8 percent.
The interest of the foreign banks to enter the Azerbaijani banking market increases on the backdrop of Central Bank's devising a new model for the future development of the banking sector of Azerbaijan, which should be directed towards the qualitative development of the system.
Russian Rosselkhozbank, Turkish Sekerbank and İş Bankası and Iranian Bank Melli Iran have expressed their desire to enter the market. Rosselkhozbank has officially appealed to the Central Bank of Azerbaijan for permission to open a representative office in the country. Sekerbank still studies the banking market of Azerbaijan, and İş Bankası has officially appealed to the CBA for permission to open a branch in Baku.
Despite that it already has a branch office in Baku, Bank Melli Iran plans to create a new bank with its own investments, with a minimum capital of $50 million. It also plans to appeal for permission soon.
There are 23 banks with foreign capital in the country, as a year earlier. The share of foreign capital in seven of them is formed in the range from 50 to 100 percent, in 14 banks - up to 50 percent. Two local branches of foreign banks also operate.
As seen, the global crisis forces to again look at the principles of regulation of financial markets and financial institutions to discuss their effectiveness. One of the most important and challenging tasks of each bank is to determine a proper course of development based on analysis of the current micro and macro-economic situation. To achieve the goals, the banks should improve the qualifications of staff for effective implementation of corporate governance standards, which as a result contribute to the development of internal management and control.
In this regard, recently the Central Bank tightened the requirements for the country's banking system to improve its infrastructure. In particular, the banks need to improve corporate governance and risk management, update operating systems.
Currency market and rates of AZN
In 2010 the Central Bank continues the policy of maintaining stable exchange rate of manat, which during the crisis was the main anchor of economic stability, unlike the national currencies of other countries. During the post-crisis period, the country will also need a stable manat to accelerate economic development and eliminate the consequences of the crisis. In January-April, the rate of manat in relevant to the USD dropped by 0.05 percent.
A fundamental factor for maintaining stable exchange rate of manat was black ink of payments. Particularly due to the surpluses of payments and temporary tension in the currency market, the Central Bank considered it expedient to suppress the possibility of devaluation of the manat. Ensuring the stability of the manat due to the accumulated currency reserves has helped eliminate the psychological tensions in the currency market already in the second quarter of last year.
Unlike the rate of American currency, worsening of problems in the European region has led to a precipitous drop in European currency, which began last autumn. Even the power of united Europe, which made an unprecedented decision to establish a general crisis fund in amount of almost $1 trillion., could not save the situation.
According to international experts, the depreciation of the euro to $1 is expected early next year. Over the last four months, the European currency in Azerbaijan has fallen by 8.77 percent to 1.0641 manat as of the end of April. While the euro totaled 1.1575 manat in the beginning of the year.
As a result of currency auctions on USD/AZN_TOD in April 2010 on Baku inter-bank currency exchange, Joint-stock commercial ASB Bank was at the top of five banks-leaders of exchange currency market in accordance with share of concluded deals in summary turnover of currency auctions, the Baku inter-bank currency exchange reported.
AGBank, Bank of Baku, Pasha Bank and Bank Respublika joined the number of leading dealers of organized currency market.
|
Banks |
Percent of total volume |
|
ASB Bank |
22.74 |
|
AGBank |
18.31 |
|
Bank of Baku |
14.71 |
|
PASHA Bank |
9.57 |
|
Bank Respublika |
9.31 |
Deals by the Central Bank of Azerbaijan are not taken into account.
About 13 banks participated in BBVB currency auctions in April 2010. About 44 trade sessions were conducted in Exchange E-Auction System in reported month. About 31 deals were registered. Total amount of currency auction on USD/AZN totaled 38,824 million manat or $48,324 million in the reported month.
Total amount of auction in currency section increased by 5,933 million manat or 15.28 percent in the reported month.
Daily turnover in exchange E-system of auction on USD/AZN reached $2,197 million. Average amount of each deal hits $1,559 million.
Exchange rate of national currency in instrument USD / AZN_TOD in the report month increased from 0.8035 manat to 0.8035 manat to $1. This average exchange rate of the dollar against the manat in April amounted to 0.8034 manat per $1 which is equal to March 2010.
Monetary market
The Azerbaijani Central Bank states about increase in money supply by 2.7 per cent in April and by 34.1 percent compared to April 2009.
Thus, as of late April, M2 figure was 6347.7 million manat compared to 6,182.6 million manat at the end of March and 4,732.3 million manat May 1, 2009.
As of late April the index M0 (cash in circulation) hit 4434.3 million manat compared to 4,312.1 million manat at the end of March and 3,297.1 million manat May 1, 2009.
Broad Money Supply (M3) hit 8735.5 million manat in April compared to 8,673.4 million manat at the end of March and 6502.4 million manat May 1, 2009.
Transaction money (M1) amounted to 5,337.5 million manat in April compared to 5,190.7 million manat at the end of March and 4109.5 million manat May 1, 2009.
|
Amount, 01.05.2010 |
|
|
Money mass in extensive understating (М3) |
8735,5 |
|
Money mass on manat (М2) |
6347,7 |
|
Cash in manat (М0) |
4434,3 |
|
Non-cash in manat |
1913,4 |
Loan portfolio
Azerbaijani banks increased lending of the economy in April by 1.4 percent or 38.3 percent compared to April 2009.
By the end of April, the banks allocated 8,605,5 million mnaat (including 5,126,1 million manat in national currency and 3.4794 million manat in hard currency) compared to 8,485,2 million manat (including 5,044,3 million manat and 3440, 9 million manat, respectively) as of April 1 and 6221,3 million manat (3,477.1 million manat and 2.8013 million manat) as of May 1, 2009.
In April the share of loans in national currency was 59,6 percent, in foreign currency - 40,4 percent.
Loans and advances worth 365.2 million manat of the total portfolio were expired compared to 355.9 million manat as of April 1, and 200.8 million manat as of May 1, 2009. Statistics of expired loans does not take into account similar loans of non-banking credit organization Aqrarkredit.
Short-term loans as of late April amounted to 2314.1 million manat (including 174.7 million manat of expired loans) compared to 2,288,9 million manat (including 174.5 million of expired loans) by late March, 2,096,9 million manat (116,2 million manat) as of May 1, 2009. In April the amount of short-term loans in the economy increased by 1,1 percent or 10.4 percent compared to April 2009.
Long-term loans amounted to 6291.2 million manat (including 190.5 million manat of expired loans) compared to 6196.3 million manat (including 181.5 million manat of expired loans) as of April 1, about 4.1815 billion manat (84.6 million) as of May 1, 2009. In April the amount of long-term loans increased by 1.5 percent or 50.5 percent compared to April 2009.
The only public bank in the country (International Bank of Azerbaijan) allocated loans worth 3.982 million manat with specific weight of 46,3 percent (increased by 1.5 percent in April) in late April, and private banks - 4.441 million manat specific weight of 51, 6 percent (an increase of 1.4 percent). The remaining 2.1 percent falls to non-bank credit organizations, which got 182.4 million manat.
As of May 1, the average rate on bank lending to the economy of Azerbaijan in national currency amounted to 14.17 percent compared to 13.99 percent as of April 1, 16.25 percent as of May 1, 2009, the Central Bank of Azerbaijan reported
Average interest rate on bank lending in hard currency amounted to 15.27 percent compared to 15.40 percent and 16.98, respectively.
As of early May, the average rate on bank lending to legal entities in national currency hit 11.72 percent compared to 11.60 percent as of April 1, 13.43 percent as of May 1, 2009. The average rate on bank credits to corporate clients in hard currency was 12.41 percent compared to 12.55 percent as of April 1, 15.05 percent as of May 1, 2009.
In this period, the average rate on bank lending to individuals in national currency amounted to 20.13 percent compared to 19.93 percent as of April 1 and 21.06 percent as of may 1,2009. Average interest rate on bank credit to the individual clients in hard currency was 22.21 percent compared to 22.09 percent and 20.27 percent respectively
Banking sector
In April 2010, the deposit base of Azerbaijani banks decreased by 1.5 percent and increased by 27.3 percent compared to April 2009.
According to the CBA, as of late April, the aggregate amount of bank deposits and deposits by legal entities and individuals hit 4612.8 million manat compared to 4683.4 million manat in late March and 3624.9 million manat in early May 2009. Of this amount, 1880.8 million manat fell to manat and 2732 million manat to the currency.
In April the deposits by individuals increased by 3.3 percent, and the deposits by legal entities by 6.6 percent. Compared to April, deposits by individual customers increased by 32.5 percent and the corporate deposits by 21.6 percent.
As of late April, 2009 the deposits of individuals in local banks made up 2474.7 million manat compared to 2395 million manat as of late March and 1867.1 million manat as of May 1, 2009.
As of late April, the deposits of legal entities amounted to 2138 million manat compared to 2288.4 million manat as of late March, 1757.8 million manat as May 1, 2009.
The average rate on deposits in manat as of May 1 accounted for 11.87 percent compared to 11.40 percent as of April 1, 11.59 percent as of May 1, 2009, the Central Bank of Azerbaijan said.
The average rate on deposits in foreign currencies amounted to 11.10 percent compared to 11.09 percent and 11.84 percent respectively.
As of May.1, 2010, the average deposits rate of physical entities in manat hit 12.17 percent compared to 13.09 percent as of Apr.1 and 12.42 percent in early May 2009.Average rate on deposits from individual clients in foreign currency comprised 12.45 percent compared to 12.58 percent and 12.51 percent respectively.
As of May.1, 2010, the average deposits rate of legal entities in manat hit 4.93 percent compared to 5.36 percent as of Apr.1 and 9.49 percent as of May.1 2009.Average rate on deposits from corporate clients in foreign currency amounted to 6.04 percent compared to 5.88 percent and 6.40 percent respectively.
Today, the minimum authorized capital for banks is 10 million manat. Over several years the CBA did not consider increase of normative requirement on statutory capital of banks active in the country. However, the Azerbaijani banks suffered losses in connection with the global financial crisis. Each bank has estimated the losses and has private capitalization program for rehabilitation. Shareholders of the bank are tasked to increase capital with the consideration of future risks caused by losses.
Capitalization of the Azerbaijani banking sector increased by 1.6 percent in April and by 1.1 percent compared to 2009, totaling 2026.71 million manat.
According to the CBA, as of late April 2010, capital of 42 banks exceeded 10 million manat compared to 41 banks in April 2009. Weight of this category of banks in an aggregate amount of all banks' capital remained at the level of 93.3 percent.
Three banks' capital (weight of 1.3 percent) was formed from 5 million manat to 10 million manat. But one bank (0.2 percent) paid it from 3.5 million manat to 5 million manat and one bank (0.2 percent) paid it to 3.5 million.
Because of the failure to implement this requirement, four banks have been prohibited to attract deposits, and currently, their deposit portfolio has been reduced to zero, since sanctions, they have not attracted deposits, and the current term of deposits has expired. This year a ban was put on another bank.
The Central Bank of Azerbaijan is ready to give an opportunity to banks that are unable to maintain this status to transform into non-banking credit organizations (NBCO). The mechanism of this transformation is being devised at the level of legislation.
During the crisis period it is inexpedient to apply quantitative changes in the banking market of Azerbaijan, Elman Rustamov, the chairman of the Central bank of Azerbaijan Managing Board, believes. Any progress in this direction may affect the stability in the country's banking sector, he explains.
With consideration of these facts, the CBA has not similar plans. "We are not going to close banks, but are eager to support stability in the market."
"No serious Central Bank will take such actions in the period of instability in the global financial system. We regard the CBA as a serious organization," Rustamov said.
Earlier, it was stated that 15-20 banks are enough for the economy of Azerbaijan, while presently the CBA adhere a policy of reducing their number though consolidating, but mot liquidating the banks. The CBA makes these recommendations to weak banks, which cannot stand the rivalry in the market, while there is no progress in this direction.
According to banking sector specialists, consolidation is a very complicated process and not every bank will take this step taking into account the shareholders' interests. Some shareholders are obliged to leave the bank while merging. Respectively, it might mean loss of clientele, which has formed with consideration of shareholders' interests. Some leading banks are prepared to select for merger a bank out of "weak group" having a micro-financial portfolio, though this variant is quite difficult to find.
At present only 15-20 among 47 banks are forming the system. The international financial organizations also take interests in acquiring stake in the stock capital of Azerbaijani banks. They are particularly prepared to back their merger.
The banking has a successful experience of consolidation of banks with the participation of the European Bank for Reconstruction and Development (EBRD). The present UniBank was formed as a result of merger of two commercial banks - MBank and Promtexbank in 2002, when the EBRD acquired 15-percent stake
After this, merger of Bank of Baku and IlkBank took place in 2005.
International organizations also intend to participate in the development of institutional development programs and corporate governance of banks, risk management, the process of training, technical support, etc. All these should stimulate the banking sector.
The Central Bank of Azerbaijan (CBA) is interested in consolidatng the country's banking sector, CBA Credit Organizations Supervision Department Director Rashad Orujov.
"Consolidation is a long-term process in the banking sector. In 1994-1995, the country's banking sector consisted of 250 banks and now their number is 47," he said. "A decline in their number is just a part of the process of consolidation, which passed quite calmly for a long period."
The CBA has not established a time-frame for banks in the process of merging. "As the CBA, we are interested in banks merging, strengthening, and raising capital because there is a need for funding major projects and we need big players on the market," Orujov said.
Support from international financial organizations is needed in this process, he added.
The Central Bank of Azerbaijan noted that in May 2010 the aggregate capital of the banking system of the country totaled 12.04 billion manat, or 0.07 percent more than the figure as of the beginning of April and 3.2 percent as of the beginning of the year.
Bank's investments totaled 882.13 million manat, an increase of 3.1 percent in April, loans to customers - 8,121,690 (1.5 percent). The amount of loans and deposits issued by the financial sector totaled 532.78 million, or one percent less. Funds on correspondent accounts for the reported period amounted to 786.9 million manat, 26.2 percent less. Cash funds of the Azerbaijani banks as of May 1, 2010 amounted to 673.14 million, an increase of 15 percent.
Total liabilities of Azerbaijani banks as of May 1, 2010 amounted to 10.012 billion manat, falling by 0.2 percent compared to April. Of the amount, 4419.26 million manat accounts for deposits, 4893.22 million manat - market loans and deposits from the financial market.
The total number of credit organizations operating in the country, based on the authorization of the Central Bank of Azerbaijan, increased 3 since the beginning of 2010, totaling 145.
During the reported period, 98 non-bank credit institutions operated in Azerbaijan compared to 96 in late 2009. The number of non-banking credit organizations, funded by international humanitarian organizations, has remained unchanged. There are 18 organizations.
During the reporting period, about 47 banks possessed licenses to conduct banking activities in the territory of the Republic. Their number has increased as a result of the issuance of licenses by the Central Bank in late March to another bank with the Azerbaijani capital - BTB Bank.
The bank said that at present, there are two banks are in the process of liquidation. Last year, there were no quantitative changes on the country's banking market. The number of banks decreased by two as a result of revocation of licenses of two banks in 2008 - Poctbank and Atlantbank. Permissions for banking activities were given to Nahchivanbank and Azfinans Bank. About 23 banks are operating in Azerbaijan with foreign capital. Weight of foreign capital has been formed from 50 to 100 percent in seven banks, up to 50 percent - in 14 banks. Other two local branches of foreign banks are also operating.
The number of branches of local banks amounted to 631 compared to 626 in late 2009. The only semi-Bank has 38 branches (their number remained unchanged last year). Accordingly, the remaining 593 branches are established by private commercial banks, increased by 5 offices during the first quarter and 46 - during the year.
Some banks are facing a problem of excessive liquidity, which finally reduces their profitability. The major problem is linked with slowdown in the country's economy by force of global financial developments.
The number of banks operating with profit hits 34 in April in Azerbaijan, reducing by five banks compared to April 2009 and increased by one bank compared to the previous month, the Central Bank of Azerbaijan (CBA) said.
The total profit of the banking system declined by almost a half compared to April 2009, and increased by 44.4 percent compared to the previous month, reaching 55.01 million manat.
The number of unprofitable banks in relation to March remained unchanged, and by April of the previous year increased by six banks. As a result, loss of 13 banks amounted to 21.8 million manat, which is 11.5 percent more than in March and 2,8 times more than last year.
Financial results of banks (after tax) in manats:
|
Periods |
Number of banks operating with profit |
Total profit of banking system (on profitable banks) |
Number of banks operating with loss |
Total loss of banking system |
Final profit (+) or loss (-), received by banks |
|
April 1, 2008 |
37 |
118,25 |
8 |
8,34 |
109,91 |
|
April 1, 2009 |
39 |
112,63 |
7 |
7,77 |
104,86 |
|
April 1, 2010 |
34 |
76,81 |
13 |
21,8 |
55,01 |
Stock market
The total amount of transactions for the period of January-April 2010, for all securities traded in Baku Stock Exchange was 598.37 million manat, which decreased by 3.66 times.
The overall corporate securities market decreased by 10.28 percent and hit 102,646 million manat.
This is due to a decline in transactions with shares in 2.3 times, while the number of transactions increased by 28.75 percent to 1,536.
The government securities market decreased 4.19-fold, reaching 495.73 million manat. This decline has affected the repo transactions that declined by 5.58 times, although the number of transactions decreased slightly (by 0.68 percent).
Comparative table on the results of trades of Corporate Securities at BSE
(January to April 2010):
|
Market segments |
2010 (30.04.10) |
2009 (30.04.09) |
Percentage ratio |
||
|
Volume of transactions, AZN |
Number of transactions |
Volume of transactions, AZN |
Number of transactions |
||
|
Corporate bonds- (placement) |
30,407,516.26 |
46 |
0.00 |
0 |
- |
|
Corporate bonds - (secondary market) |
24,434,819.55 |
20 |
4,385,049.00 |
13 |
557.23% |
|
CBs Total |
54,842,335.81 |
66 |
4,385,049.00 |
13 |
1250.67% |
|
Stocks - (placement) |
45,105,900.00 |
880 |
81,136,898.00 |
136 |
55.59% |
|
Stocks - (secondary market) |
2,697,762.92 |
656 |
28,885,437.80 |
1,057 |
9.34% |
|
Stocks Total |
47,803,662.92 |
1,536 |
110,022,335.80 |
1,193 |
43.45% |
|
CS Market Total |
102,645,998.73 |
1,602 |
114,407,384.80 |
1,206.00 |
89.72% |
Comparative table on the results of trades of Government Securities at BSE
(January-April 2010)
|
Market segments |
2010 (30.04.10) |
2009 (30.04.09) |
Percentage ratio |
||
|
Volume of transactions, AZN |
Number of transactions |
Volume of transactions, AZN |
Number of transactions |
||
|
GB - (AR MF) (placement) |
104,271,460.93 |
38 |
149,463,834.10 |
80 |
69.76% |
|
GB - (AR MF) (secondary market) |
53,864,765.96 |
10 |
133,938,054.04 |
69 |
40.22% |
|
GB Total |
158,136,226.89 |
48 |
283,401,888.14 |
149 |
55.80% |
|
Notes (AR CB) - (placement) |
61,552,178.99 |
58 |
185,906,325.68 |
103 |
33.11% |
|
Notes (AR CB) - (secondary market) |
0.00 |
0 |
64,784,623.64 |
35 |
0.00% |
|
Notes Total |
61,552,178.99 |
58 |
250,690,949.32 |
138 |
24.55% |
|
Repo operations |
276,040,347.90 |
291 |
1,541,329,472.77 |
293 |
17.91% |
|
GS Market Total |
495,728,753.78 |
397 |
2,075,422,310.23 |
580 |
23.89% |
Abbreviations:
GB - Governmental bonds
GB - Governmental securities
CB - Corporate bonds
CS - Corporate securities