Monetary market (January-June 2010)

Pre-crisis measures taken by the Central Bank of Azerbaijan (CBA), as well as effective package of measures to enhance financial stability enabled to achieve one of the main goals - financial stability.

Unlike most countries, the cases of bankruptcy or financial disasters were not observed in the banking sector of Azerbaijan. Preventive measures by the Central Bank allowed the country's banking sector to be prepared to the global crisis.

Due to this, during the crisis, the banking sector had no problems with the implementation of obligations before contractors. The banking system continues to successfully carry out its primary function, that is a function of financial intermediation, demonstrating stable growth dynamics. Last year the community deposits grew by about 34 percent and the loan portfolio by 38 percent.

The growth of deposits once again testifies the high public confidence in the banking sector. The exchange rate of manat in relevant to major convertible currencies was protected from devaluation, which ultimately prevented the rise in prices, reduction of welfare and impairment of deposits.

The results achieved in promoting stability of the system were also highly assessed by the international financial institutions. In addition, the international rating agency Fitch in May 2010 raised the country's sovereign rating to investment rating (BBB-).

The Central Bank will continue the policy of strengthening stability and financial stability of the banking sector, as well as institutional development.

Currently, CBA is not considering closing banks, since the financial situation of institutions that form the banking sector is stable and does not cause fears.

The Central Bank of Azerbaijan (CBA) does not consider it necessary to provide financial support for the banking sector.

The preventive measures of the Central Bank provided the banks with a high level of capital adequacy, which is capable to cover potential losses, a source at the CBA told Trend.

The Law on Central Bank has been amended accordingly to allow the Central Bank to provide material support for the banking sector if necessary. But the banks also have high liquidity, which in turn ensures the timely implementation of obligations, including repayment of external loans.

As of July 1, 2010, the rate of capital adequacy in the banking system amounted to 17.2 percent and the current liquidity two to three times exceed the norms set by the Central Bank.
According to the international rating agency Fitch Ratings, liquidity risk and refinancing in Azerbaijani banks are at the background.

He said that Azerbaijani Central Bank actively assist in stabilizing the situation in the banking sector. It refinanced a number of banks with high external debt burden, thus allowing them to refinance foreign loans.

According to the agency, liquidity risk and refinancing are at the background, since much of the external debt of the banks were repaid. The "liquidity cushion" of assets increased due to lower demand for credit in the economy and also due to tighter control of banks in respect of loan during crisis.

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 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 appealed for permission.

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-June, the rate of manat in relevant to the USD dropped by 0.12 percent, but to euro - increased 15.19%.

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 June 2010 on Baku inter-bank currency exchange (BBVB), Joint-stock commercial ASB Bank  (Аzerbаycаn Senаyе Bаnкı) 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. Unibank, AGBank, Pasha Bank, and  AccessBank 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.

Seven banks participated in BBVB currency auctions in June 2010. About 40 trade sessions were conducted in Exchange E-Auction System in reported month. About 29 deals were registered. Total amount of currency auction on USD/AZN totaled 34,276 million manat or $42,647 million in the reported month. Total amount of currency auction on EUR /AZN totaled 1,879 million manat

Total amount of auction in currency section hit 249  million manat in the reported month.

Daily turnover in exchange E-system of auction on USD/AZN reached $2,132 million. Average amount of each deal hits $1,471 million.

Exchange rate of national currency in instrument USD / AZN_TOD in the report month increased by 0.04 percent from 0.8037 manat to 0.8040 manat to $1. This average exchange rate of the dollar against the manat in June amounted to 0.8037 manat per $1 compared to 0.8036 manat per $1.

Monetary market

The Central Bank of Azerbaijan (CBA) noted an increase in money supply (M2) by 2.7 percent for June and 36.1 percent compared to June 2009, the CBA said.

As of late June M2 amounted to 6.629.4 billion manat compared to  6454 million manat in late May, 4872 million manat July 1, 2009.

As of late June M0 hit 4,587,3 million manat compared to 4,543,5 in late May, 3,486,4 million manat July 1, 2009.

Broad Money Supply (M3) hit 9,082,5 million manat as of late June compared to 8,929,8 million manat in late May, 6,693,9 million manat July 1, 2009.

Transaction money (M1) amounted to 5,544.1 million manat in June compared to 5,439,8 million manat in late May, 4,198,8 million manat July 1, 2009.

Parameters of monetary market, in mln manat

Loan portfolio

In June 2010 the banks increased lending to the economy of Azerbaijan by 1.2 percent, but increased compared to the same period of 2009 by 36.8 percent.

As of late June, 2010 the banks provided loans totaling 8840.7 million manat (including 5311.3 million manat in national currency and 3529.4 million in hard currency) compared to 8733.5 million manat (5223.3 million manat in national currency and 3510.2 million manat in hard currency) as of June1, 6463.8 million manat (3469.9  million manat and 2993.9 million manat) as of July 1 2009.

In June, the share of loans provided in national currency was 60.1 percent, in foreign currency - 39.9 percent.

Of the total portfolio of loans, 408.6 million manat were overdue compared to 383.6 million manat as of June.1, 242.8 million manat as of July 1, 2009. Statistics of overdue loans does not include similar loans of non-bank credit institution Aqrarkredit.

Short-term loans as of late February amounted to 2266.8 million manat compared to 2349.6 million manat  as of late May, 2119.4 million manat as of July 1, 2009. In June the amount of short-term credit in the economy decreased by 3.3 percent but increased by 7 percent compared to June 2009.

Long-term loans amounted to 6492.9 million manat  compared to 6388.5 million manat as of June.1, 4344.4 million manat as of July 1, 2009, . In June the amount of long-term loans grew by 1.6 percent, compared to June 2009 - by 49.5 percent.

As of late February, the only state bank of the country (the International Bank of Azerbaijan) granted loans totaling 4046.4 million manat with a specific weight of 45.8 percent (increased by 0.7 percent in June), and private banks - 4611.9 million manat with a specific weight of 52.2 percent (increased by 1.7 percent). The remaining 2.1 percent fall on the share of non-bank credit organizations, which provided loans of 182.4 million manat.

On July 1 the average rate on bank credit to the economy of Azerbaijan in national currency amounted to 16.06 percent compared to 15.88 percent June 1, 17.12 percent July 1, 2009, the Central Bank of Azerbaijan (CBA) said.

The average rate on bank lending in hard currency was 17.12 percent compared to 17.12 percent and 17.59 percent respectively.

In early July, the average rate on bank lending of a legal entity in national currency amounted to 14.46 percent compared to 14.14 percent June 1, 14.80 percent July 1, 2009. The average rate on bank loans to corporate clients was 14.53 percent compared to 14.69 percent June 1, 15.01 percent July 1, 2009.

During the reporting period, the average rate on bank lending of an individual entity in national currency amounted to 19.91 percent compared to 20.10 percent June 1 and 21.19 percent July 1, 2009. The average rate on bank loans for individual clients was 23.17 percent compared to 23.09 percent and 22.67 percent respectively.

Banking sector

In June, a deposit base of Azerbaijani banks increased by 0.7 percent, and by 27.5 percent compared to June 2009, the Central Bank of Azerbaijan (CBA) said.

According to the CBA, at the end of June the total amount of bank deposits and deposits of legal and physical entities amounted

4,711,4 million manat compared to 4,679,9 million manat in late May, about 3696.3 million manat - at the beginning of July 2009. About 1,960.1 million manat manat fell to manat funds, and 2751.3 million manat - the currency.

In June physical entities' deposits have increased by 3,3 percent, while the volume of corporate deposits declined by 2.3 percent. In relation to the June 2009 deposits of individual customers increased by 32.4 percent and corporate deposits - by 22 percent.

By the end of June, the volume of physical entities' individual deposits in the banks amounted to 2.5628 billion manat compared to 2.4817 billion manat in late May, 1,935,6 million manat July 1, 2009.

By late June, the deposits of legal entities amounted to 2.1486 billion manat compared to 2,198.2 million in late May, 1760.7 manat - July 1, 2009.

The average rate on deposits in manat July 1 was 11.81 percent compared to 11,20 percent June 1, 11.45 percent July 1, 2009, the Central Bank of Azerbaijan (CBA) said.

The average rate on deposits in foreign currencies amounted to 10.95 percent compared to 10.87 percent and 11.77 percent respectively.

On July 1 the average rate on deposits of physical entities in manat hit 12.81 percent compared to 12.91 percent June 1, 12.75 percent in late July 2009. The average rate on deposits of individual customers in foreign currencies amounted to 12.54 percent compared to 12.65 percent, 12.53 percent, respectively.

In late July, the average rate on deposits of legal entities in manat hit 6.73 percent compared to 5.40 percent June 1 and 8.36 percent July 1, 2009. The average rate on deposits of corporate clients in foreign currency amounted to 5.78 percent compared to 5.97 percent and 6.19 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.

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.

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.

Total assets of Azerbaijani banks as of July 1, 2010 amounted to 12.18 billion manat, which is 1.2 percent more compared to early June, and 4.4 percent - at the beginning of the year, the Central Bank of Azerbaijan said.

Banks' investments amounted to 891.7 million manat, increased in June by 1.9 percent, loans given to customers - 8.348.4 million manat (1.3 percent). The volume of loans and deposits issued by the financial sector amounted to 524.02 million manat, reducing by 0.06 percent. Funds on correspondent accounts for the period amounted to 948.05 million manat, increasing by 11.7 percent. Cash of Azerbaijani banks as of July 1, 2010 amounted to 420.7 million manat, decreased by 4 percent.

Total liabilities of Azerbaijani banks as of July 1, 2010 amounted to 10.122.55 billion manat, increasing by 1.3 percent in June. About 4.611.97 million manat falls to deposits, and 4.898.95 million manat - loans and deposits received from the financial market.

The total number of credit institutions operating in the country based on the authorization of the Central Bank of Azerbaijan increased by six and hit 148 in the first quarter of 2010, the bank said.

In this period 101 non-bank credit institutions operate 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 got 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 - VTV Bank.

The bank said that at present, there are two banks 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.

The number of branches of local banks amounted to 640 compared to 626 in late 2009. The only semi-Bank has 38 branches (their number remained unchanged last year). Accordingly, the remaining 602 branches are established by private commercial banks, increased by 14 offices during the first quarter and 27 - during the year.

Central Bank says that country's banking system has very high liquidity, and a factor in its increase is the growth of deposits, but the banks need to more effectively place them in order to reduce risk and maintain their financial performance at a stable level. 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 June, the number of banks operating at a profit in Azerbaijan hit 30, reducing by nine banks, in June 2009 and in relation to the previous month remained unchanged, the Central Bank of Azerbaijan (CBA) said.

The total profit of the banking system reduced by almost 51.7 percent compared to June 2009, and increased by 16.6 percent compared to the previous month, reaching 70.52 million manat.

The number of unprofitable banks in relation to May remained unchanged. The number increased by 10 banks by June the previous year. As a result, loss of 17 banks amounted to 24.27 million manat, or 1.1 percent less than in May, and more than 3 times than last year.

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

Stock market

Turnover of corporate securities in Azerbaijan was 844,995 million manat in the first half of 2010 which is by 2.96 times less the figure in the same period of 2009, the Baku Stock Exchange reported.

The overall corporate securities market increased by 1.18 percent and amounted to 176.87 million manat compared to the same period of 2009. The increase in transactions with corporate securities is observed due to the increased volume of transactions with bonds at 2.29 times, while the number of transactions grew by 3.3 times up to 110.

The government securities market decreased by 3.48 times, and hit 668.127 million manat. This was affected by a significant reduction in the repo transactions in 4.49 times, although the number of transactions declined (by 6.19 percent).

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

(January to June 2010):

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

(January to June 2010)

Abbreviations:

GB - Government bonds

GS - Government securities

CB - Corporate bonds

CS - Corporate Securities