Review of monetary sector in Azerbaijan (Jan.-Aug. 2012)

The Azerbaijani Central Bank (CBA) has prepared new rules for calculating the bank's capital and its adequacy for the country's banking sector. According to them, the banks must hold the total capital adequacy ratio at a level which does not exceed 12 percent, and Tier I capital adequacy ratio - 6 percent. The rules, including the total capital structure and the calculation formula, have been submitted for the banks' discussion.

The structure of the banks' total capital includes the capital of the first and second tiers. Tier I capital includes the bank's main capital. Its amount must not be less than 50 percent of total capital.

Tier I capital consists of the following components - fully paid ordinary shares in circulation and non-cumulative permanent preferred shares, capital surplus, net income undistributed from previous years, capital of minority shareholders in consolidated subsidiaries of the bank.

Tier II capital is additional capital. It includes the profit for the current year, the total reserves (up to 1.25 percent of the risk of balance sheet assets and off-balance sheet obligations, which do not exceed the sum of ordinary reserves, cumulative perpetual preferred shares, subordinated debt obligations, issued for at least five years). The amount of subordinated debt obligations taken into account while calculating Tier II capital must not exceed 50 percent of Tier I capital. The part exceeding this amount is not taken into account while calculating the total capital.

Tier II capital amount in the total capital of the bank must not exceed Tier I capital.

Including the securities issued by the bank and the funds raised from other similar hybrid financial instruments in the bank's capital may be permitted by the Central Bank. They must meet the following criteria: the inability of withdrawing at the request of creditors, the bank's deferment of interest payments on these instruments, the obligations under these instruments if the bank is liquidated, only after all other creditors' requirements are fulfilled, the bank's non-guarantee of fulfilling the obligations under these instruments in any form, deferment of fulfilling the obligations on these instruments, if the bank's capital adequacy ratio is below than the CBA minimum level.

CBA's minimum requirement to a total capital of the bank is 10 million manat and it will reach 50 million manat from January 1, 2014.

According to the CBA board's decision, the minimum total capital of existing banks and the authorized capital of newly established banks increased to 50 million manat. The CBA's decision was made on July 25, 2012.

The new regulation for the minimum total capital will take effect from January 1, 2014. Today, the minimum requirement for capitalization of existing and newly established banks is 10 million manat.

The transition period provides the banks with sufficient time to implement the strategies to correspond with the new capital requirements and for the gradual implementation of capitalization. The research shows great potential in the banking sector to meet the new requirement.

Using a new requirement along with strengthening the capital position of the Azerbaijani banks increases capital and efficiency of financial intermediation. As a result, the stability of the banking system and financial stability will be enhanced.

Amrahbank became the first of the existing banks in the country, which announced about increasing the capital to the new regulatory minimum. According to the bank, a general meeting of Amrahbank shareholders was held on August 3. A decision was made to increase the bank's total capital from 22.028.570 manat to 50.000.000 manat. In this regard, the bank's board was entrusted with the relevant tasks.

In August, another Azerbaijani bank - "NBC Bank" reacted to the CBA decision about increasing the minimum total capital requirements of banks by five-fold. A decision was made at the general meeting to bring the total capital of the bank to a minimum of 50 million manat till late 2013.

"Bank of Azerbaijan" decided to increase the authorized capital from the current 33.5 million manat to 50 million manat in August. "Bank of Azerbaijan" registered prospectus for the banks' shares for a total of 16.5 million manat in the State Committee for Securities. It is planned to issue 825,000 shares at 20 manat each. After placing the required number of shares, "Bank of Azerbaijan" will increase its authorized capital to 50 million manat, which will allow it to take a place in the top ten banks in terms of authorized capital.

Another Azerbaijani bank - Parabank has reacted to the CBA decision about increasing the minimum total capital requirements of banks by five-fold. The extraordinary general meeting of shareholders was held on October 1. The issue of bringing the total capital of the bank to a minimum of 50 million manat till late 2013 was considered. The bank took the decision in August.

CBA has announced that its foreign exchange reserves for the first time have overcome a psychological mark of $ 11.2 billion. In August 2012, the growth of CBA currency reserves amounted to 1.4 percent compared to July. They have been increased by 7.6 percent since 2012.

Currency market and manat rate

In Aug. 2012, the official exchange rate of manat compared to the U.S. dollar strengthened by two points. The dollar exchange rate in the country decreased from 0.7855 manat per U.S. dollar to 0.7853 manat per dollar from early Aug. to late Aug.

Dollar exchange rate in the country was slightly fluctuated several times during a month, rising again to 0.7856 manat to the U.S. dollar on August 7-8, and falling to 0.7854 manat per U.S. dollar on August 9.

In August, the euro rate in Azerbaijan showed a gradual increase by 171-points. Thus, the exchange rate of the euro from 0.9659 manat per euro from early August rose to 0.9830 manat per euro by late August. A monthly minimum rate - 0,9654 EUR / AZN was fixed on Aug. 3-5, the monthly maximum rate - 0,9865 EUR / AZN was reached on August 24-26. The fluctuations between the maximum and minimum value was 211 points.

The forecast of the average annual rate of national currency compared to the U.S. dollar remains unchanged - at 0.79 manat until 2015 as in 2011. As one can see, the government preserves stability with respect to the forecast of the dollar rate and predicts a gradual appreciation of the manat compared to the euro.

According to the forecasts of the Azerbaijani government, the rate of the manat compared to the euro in 2012 is expected to hit 1.0910 manat per one euro compared to 1.0939 manat expected in 2011 (according to the CBA, the exchange rate was 1.0178 manat as of the end of the year). The rate for 2013 is projected at 1.0608 manat, in 2014 - 1.0430 manat and 2015 - 1.0387 manat.

The total volume of trades in currency section of Baku Interbank Currency Exchange (BBVB) in Aug. decreased by 12.24 million manat or 18 percent, the exchange said.

In total, 8 banks took part in the trades of currency section of the BBVB in Aug. In accounting month in "Bourse E-System of Trades" (BEST) 42 trading sessions were conducted and 29 transactions were registered.

The total volume of trades in currency section on USD / AZN reached 56.343 million manat or 71.749 million in dollar equivalent.

The average daily turnover in "Bourse E-System of Trades" on USD/AZN reached approximately $ 3.417 million in Aug., then that the average volume of each transaction has made $ 2.474 million.

The exchange rate of national currency on USD / AZN_TOD in the reporting month, increased by 0.03 percent - from 0.7848 to 0.7846 manat to $1. The average rate of the U.S. dollar compared to manat was 0.7853 manat to $1 in Aug. 2012 compared to 0.7853 manat as of July.

Monetary market of Azerbaijan

The CBA's important task is to govern the money supply at an adequate level of macroeconomic and financial stability in terms of a continuous growth of foreign exchange reserves and high liquidity of the banking system.

The Azerbaijani Central Bank stressed an increase in all units of the money supply as of eight months of 2012 compared to a similar period of last year and all parameters compared to early 2012. This is a result of the influence of two factors: the increase in the quantity of money in circulation and the rate of their turnover.

The Central Bank of Azerbaijan (CBA) noted the increase in money supply (M2) (cash in circulation (outside banks) and remainders in the domestic currency on accounts of non-financial organizations, financial (excluding credit) organizations and physical entities) by 11.1 percent during eight months of 2012 and 27.7 percent compared to Jan.-Aug. 2011.

So, as of Sept. 1, 2012, the rate of M2 was 12.218.3 billion manat compared to 9.569.8 billion manat as of Sept. 1, 2011 and 10.997.2 billion manat as of early 2012.

The amount of cash money supply (M0) as of Sept. 1, 2012 hit 8.134.6 billion manat compared to 6.493.7 billion manat as of Sept. 1, 2012 and 7.158.2 billion manat as of Jan.1, 2012.

As of Sept. 1, 2012, Broad Money Supply (M3) totaled 15.003.0 billion manat compared to 12.336.2 billion manat in Sept. 1, 2011 and 13.903.2 billion manat as of early 2012.

The transaction money (M1) amounted to 9.913.6 billion manat as of Sept. 1, 2012 compared to 7.885.5 billion manat as of early Sept. 2011 and 8.824.8 billion manat as of early 2012.

Parameters of monetary market, in mln manat

Amount as of Aug. 1,2012

Money mass in extensive understating (М3)

15003,0

Money mass on manat (М2)

12218,3

Cash in manat (М0)

8134,6

Non-cash in manat

4083,7

The monetary base in Azerbaijan in 2012 returned to the phenomenal growth of the last year. In August, it rose by 1.5 percent in July.

According to the Azerbaijani Central Bank, as of September 1, 2012, the monetary base amounted to 9.076.3 billion manat (absolute record) compared to 8.940.2 billion manat as of August, 8.275.4 billion manat as of January 1, 2012 and 6.397.1 billion manat as of January 1, 2011.

Last year, the monetary base increased by 29.4 percent. Its growth totaled 9.68 percent in 2012.

Stock market

The total turnover of transactions on all instruments on Baku Stock Exchange (BSE) for January-August 2012 totaled 7.552 billion manat, or by 42.87 percent more compared to the same period of 2011.

Such an increase in stock market in the country is ensured by increasing the state securities market by 46.06 percent, while the corporate securities market increased by 2.77 percent.

The state securities market reached 7.15 billion manat influenced by the increase in repo transactions by 53.84 percent and growth of operations with the notes of the Central Bank by 30.68 percent. The primary market increased by 37.25 percent, and secondary - by 30.68 percent.

The increase in the corporate securities market is explained by the increase in the volume of transactions with corporate bonds by 73.09 percent. The volume of the corporate securities market was 399.86 million manat in January-August.

Comparative table on the results of trades of Corporate Securities at BSE (January-August 2012)

Market segments

Aug.31,2012

Aug.31,2011

Percentage ratio

Volume of transactions, AZN

Number of deals

Volume of transactions, AZN

Number of deals

Corporate bonds- (placement)

37 341 335,00

66

94 889 971,50

59

39,35%

Corporate bonds - (secondary market)

224 281 573,42

74

212 864 952,01

59

105,36%

Stocks - (placement)

131 322 181,67

110

75 868 402,58

109

173,09%

Stocks -

(secondary market)

6 911 606,95

2 257

5 470 910,24

2 471

126,33%

CS Market Total

399 856 697,04

2 507

389 094 236,33

2 698

102,77%

Comparative table on the results of trades of Government Securities at BSE (January-August 2012)

Market segments

Aug.31,2012

Aug.31,2011

Percentage ratio

Volume of transactions, AZN

Number of deals

Volume of transactions, AZN

Number of deals

GB - (AR MF) (placement)

67 733 542,77

29

196 760 768,77

109

34,42%

GB - (AR MF) (secondary market)

9 334 451,92

7

37 363 495,54

38

24,98%

Notes (AR CB) - (placement)

715 179 262,24

173

527 072 784,43

202

135,69%

Notes (AR CB) - (secondary market)

12 486 939,02

8

9 555 687,77

5

130,68%

Repo operations

6 348 180 243,46

839

4 126 502 225,73

871

153,84%

GS Market Total

7 152 914 439,41

1 056

4 897 254 962,24

1 225

146,06%

Abbreviations:
- GB - government bonds,
- GS - government securities,
- CB - corporate bonds,
- CS - corporate securities.

At present, the licenses for broker-dealer activity were temporarily suspended among 5 of 16 BSE members.

According to BSE, the permission for activity of Azerbaycan Senaye Bankı, AzerTurkBank, Kapital Partners, Mars İnvestment, Xalq Kapital as professional participants of the securities market in the country was suspended.

The suspension of the banks' licenses is connected with the fact that the banks, being issuers, may not act as professional market participants in accordance with the legislation. This practice is used all over the world. In this regard, after the license of banks for broker-dealer activity expires, new permits are issued to their subsidiaries.

Today there are 14 licenses for brokerage activity, 13 - dealer, three - depository, one - clearing, one - professional activity on the stock exchange, two - for keeping the register of holders of the securities in the Azerbaijani securities market.

Only local organizations can be members of the exchange. Membership fee at the BSE is 60,000 manat.

At present, BSE has 19 shareholders, taking into account the Istanbul Stock Exchange. The authorized capital of the BSE is 1.2 million manat.

The Azerbaijani National Depository Center stressed the increase in the stock market turnover in August 2012. Phenomenal growth rates were recorded in 2011, when the turnover of the securities market in the country exceeded the turnover for 2010 by 4.69 times.

According to the center, around 287 transactions with securities with a nominal value of 150.04 million manat were signed in Aug. 2012 compared to 328 transactions with securities worth 94.7 million manat in July and 150 transactions with a total nominal value of 27.55 million manat in January this year.

As a result, the turnover for 2012 totaled 2.450.4 billion manat on 2,941 deals compared to 2.420.6 billion manat on 4,992 transactions for 2011.

Around 20 deals on placing the shares worth 76.720.354 million manat, 241 stock exchange transactions worth 70.938.414 million manat and 26 off-exchange transactions worth 2.381.524 million manat were concluded in Aug. The placement on 158 transactions hit 195.736.666 million manat, off-exchange transactions on 424 transactions - 46.937.7 million manat, stock exchange transactions on 2,291 transactions - 2.207.599 million manat in January-August.

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