Review of monetary sector in Azerbaijan (January-May 2010)

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.

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.

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.

Today business - organizations have unpaid debts to Azerbaijani banks, which affects the quality of their loan portfolios negatively. 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-May, the rate of manat in relevant to the USD dropped by 0.087 percent, but to euro - increased 14.49%.

CBA changed the structure of the currency basket, defining it in a ratio of 90 to 10 percent in dollars and euros, respectively. The Central Bank passed to the maintenance of cost of the Azerbaijani manat, through the introduction of a mechanism of a currency basket consisting of dollar and euro March 11, 2008. The structure of the basket in 2008 was determined at a ratio of 70 to 30 percent in dollars and euros, respectively.

"We passed to the mechanism of regulation of the currency basket of exchange rate of manat, given the growing interest in dollar. Now we are focused on maintaining a stable currency. The last period has shown the correctness of our decision. The main goal is to maintain control over the change in dollar. It does not disturb us, " CBA deputy chairman Aftandil Babayev said.

Analysis of the previous period (before the introduction of dual currency mechanism) showed that the introduction of a new concept allowed providing for a neutral level of nominal effective exchange rate of manat to the currencies of major trading partners in a global intensification of inflation. Thus, the introduction of dual currency mechanism enhanced the effect of inflation on imports, and reduced the risks of economic subjects, conducting operations with the countries of the eurozone. It allowed to neutralize fluctuations between the rate of manat towards euro.

As a result of currency auctions on USD/AZN_TOD in May 2010 on Baku inter-bank currency exchange (BBVB), 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, PASHA Bank, Atabank and Zaminbank joined the number of leading dealers of organized currency market. 

Summary table reflecting the banks in the market:

Deals by the Central Bank of Azerbaijan are not taken into account.

Ten banks participated in BBVB currency auctions in May 2010. About 38 trade sessions were conducted in Exchange E-Auction System in reported month. About 28 deals were registered. Total amount of currency auction on USD/AZN totaled 27.655 million manat or $34.415 million in the reported month.

Daily turnover in exchange E-system of auction on USD/AZN reached $1.811 million. Average amount of each deal hits $1,229 million.

Exchange rate of national currency in instrument USD/AZN_TOD in the reported month dropped by 0.04 percent from 0.8034 manat to 0.8037 manat to $1. This average exchange rate of the dollar against the manat in May amounted to 0.8036 manat per $1 compared to 0.8034 manat per $1.

Monetary market

The Central Bank of Azerbaijan noted the increase in money supply (M2) by 1.7 percent in May 2010 and by 34.1 percent in annual calculation.

So, as of late May, 2010 the rate of M2 was 6454 million manat compared to 6347.7 million as of late April, 4811.2 million manat as of June 1.

The amount of cash money supply (M0) in May hit by 4543.5 million manat, compared to 4434.3 as of late April and 3396.7 manat as of June 1, 2009.

As of late May, 2010, Broad Money Supply (M3) totaled 8929.8 million compared to 8735.5  million manat as of late April, 6612 million manat as of June 1, 2009.

The transaction money (M1) amounted 5439.8 million manat as of May, 2010, compared to 5337.5 million manat and 4150.6 million manat respectively.

Parameters of monetary market, mln manat.

Loan portfolio

The banks increased lending to the economy of Azerbaijan by 1.5 percent in May 2010, but compared to the same period of 2009 by 37.4 percent, the Central Bank of Azerbaijan (CBA) said.

As of late May, 2010 the banks provided loans totaling 8733.5 million manat (including 5223.3 million manat in national currency and 3510.2 million in hard currency) compared to 8605.5 million manat (5126.1 million manat in national currency and 3479.4 million manat in hard currency) as of May 1, 6356 million manat (3446.5 million manat and 2909.5 million manat) as of June 1, 2009.

The share of loans provided in national currency was 59.8 percent, in foreign currency - 40.2 percent in May 2010,

Of the total portfolio of loans, 383.6 million manat were overdue compared to 365.2 million manat as of may 1, 209.2 million manat as of June 1, 2009. Statistics of overdue loans does not include similar loans of non-bank credit institution Aqrarkredit.

Short-term loans as of late May amounted to 2345million manat compared to 2314.1 million manat as of late April, 2113.3 million manat as of June 1, 2009. In May the amount of short-term credit in the economy increased by 1.3 percent but 11 percent compared to May 2009

Long-term loans amounted to 6388.5 million manat compared to 6291.2 million manat as of  May 1, 4242.7 million manat  as of June 1, 2009. In May, the amount of long-term loans grew by 1.5 percent, compared to May 2009 - by 50.6 percent.

As of late May, the only state bank of the country (the International Bank of Azerbaijan) granted loans totaling 4017.4 million manat with a specific weight of 46 percent (increased by 0.9 percent in  may), and private banks - 4533.6 million manat with a specific weight of 51.9 percent (increased by 2.1 percent). The remaining 2.1 percent fall on the share of non-bank credit organizations, which provided loans of 182.4 million manat.

On June 1 the average rate on bank credit of Azerbaijani economy in national currency amounted to 15.88 percent compared to 14.17 percent May 1, 17.12 percent June 1, 2009, the Central Bank said.

The average rate on bank lending in hard currency was 17.12 percent compared to 15.27 percent and 18.78 percent respectively.

At the beginning of June the average interest rate on bank lending entity in national currency amounted to 14.14 percent compared to 11.72 percent May 1, 14.78 percent June 1, 2009. The average rate on bank loans to corporate clients in hard currency was 14.69 percent compared to 12.41 percent May 1, 16.54 percent June 1, 2009.

During the reporting period, the average rate on bank lending to a physical entity in national currency amounted to 20.10 percent compared to 20.13 percent May 1 and 21.15 percent June 1, 2009. The average rate on bank loans for individual clients in hard currency was 23.09 percent compared to 22.21 percent and 23.17 percent respectively.

Banking sector

Depositary base of Azerbaijani banks increased by 1.5 percent in May, 26.3 percent compared to the same period in 2009, the Central Bank of Azerbaijan (CBA) said.

Based on the CBA data, as of late May, total sum of bank deposits and deposits by enterprises and individuals hit 4679.9 million manat compared to 4612.8 million manat as of late April and 3704.8 million manat as of early June 2009. About 1892.3 million accounted for manat and 2787.6 million manat for currency.

In May, deposits by individuals increased by 0.3 percent and legal entities by 2.8 percent. The deposits by individual clients increased by 29.6 percent, corporative clients by 22.8 39.9 percent compared to May 2009.

As of late May, the deposits of individuals hit 2481.7 million manat from the previous 2474.7 million manat as of late April and 1914.3 million manat as of June 2009.  

Deposits of legal entities totaled 2198.2 million manat in late May compared to 2138 million manat as of late April and 1790.4 million manat as of late June 2009.

Average rate on deposits in manat as of June .1 2010 amounted to 11.2 percent compared to 11.87 percent as of May 1, 11.28 percent as of June 1, 2009. Average rate on deposits in foreign currencies amounted to 10.87 percent compared to 11.10 percent and 11.56 percent respectively.

As of June 1, the average rate on deposits of individuals in manat was 12.91 percent compared to 12.17 percent as of May 1, 12.42 percent as of the beginning of June 2009. Average rate on deposits from individual customers in foreign currencies amounted to 12.65 percent compared to 12.45 percent and 12.31 percent respectively.

As of early June, the average rate on deposits of legal entities in manat was 5.4 percent compared to 4.93 percent as of May 1, 8.67 percent as of June 1, 2009. Average rate on deposits from corporate clients in foreign currency amounted to 5.97 percent compared to 6.04 percent and 6.09 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 one percent and 2.1 percent compared in 2009 to 2046.67 million manat in May, the Azerbaijani Central Bank (CBA) said.

According to the CBA, as of late May 2010, capital of 42 banks exceeded 10 million manat compared to 41 banks in May 2009. Weight of this category of banks in an aggregate amount of all banks' capital remained at the level of 98.3 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. Any progress in this direction may affect the stability in the country's banking sector.

With consideration of these facts, the CBA has not similar plans. It is 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.

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.

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 consolidating the country's banking sector.

Total assets of Azerbaijani banks as of June 1, 2010 amounted to 12,042 billion manat, which is 0.03 percent more compared to early May, and 3.2 percent - at the beginning of the year.

Banks' investments amounted to 874.95 million manat, increased in May by 0.1 percent, loans given to customers - 8241.52 million manat (1.5 percent). The volume of loans and deposits issued by the financial sector amounted to 523.7 million manat, reducing by 1.7 percent. Funds on correspondent accounts for the period amounted 849.01 million manat, increasing by 7.9 percent. Cash of Azerbaijani banks as of June 1, 2010 amounted to 438.44 million manat, decreased by 34.9 percent.

Total liabilities of Azerbaijani banks as of June 1, 2010 amounted to 9,995 billion manat, reducing by 0.2 percent in May. About 4491.05 million manat falls to deposits, and 4669.11 million manat - loans and deposits received 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.

In May, the number of banks operating at a profit in Azerbaijan hit 30 reducing by four banks compared to the previous month and by eight banks compared to April-March 2009, the Central Bank of Azerbaijan (CBA) said.

The total profit of the banking system reduced 1.62 times compared to May 2009, and increased by 10.7 percent compared to the previous month, reaching 85.03 million manat.

Number of unprofitable banks in relation to April increased by four banks, and by May last year -  nine banks. As a result, loss of 17 banks amounted to 24.55 million manat, which is 12.6 percent more than in April.

Financial results of banks (after paying tax) in million manat:

Stock market

The total amount of transactions for the period of January-May 2010, for all securities traded in Baku Stock Exchange was 739,227 million manat, which decreased by 3.15 times.

The overall corporate securities market decreased by 6.56 percent and hit 142,731 million manat.

This is due to a decline in transactions with shares in 2.2 times, while the number of transactions increased by 12.2 percent to 1,716.

The government securities market decreased in 3.7 times, reaching 596,496 million manat. This decline has affected the repo transactions that declined by 4.6 times, although the number of transactions increased slightly (by 6.1 percent).

Comparative table on the results of trades of Corporate Securities at BSE

Comparative table on the results of trades of Government Securities at BSE

Abbreviations:

GB - Governmental bonds

GB - Governmental securities

CB - Corporate bonds

CS - Corporate securities