2012 fiscal year was the start of consolidation of banks

The year for the financial sector and the banking community in particular is finishing. Among the major events of the 2012 we should certainly note eliminating the license of Royalbank by CBA on July 12 this year.

The formal reason was the failure to comply with the requirements of the bank to a minimum level and the adequacy of the total capital outstanding obligations to creditors, including the management and the current activities were not reliable, as well as failure to written instructions of the Central Bank. The truth of this statement is not convinced, given that at that time the name Royal Bank often mentioned in various illegal banking operations. For example, according to the paper Yeni Musavat, the bank has been under the supervision of the Ministry of National Security on suspicion of illegal money transfers.

The reason for the start of the investigation around the bank by the DHS was the speech of U.S. colleagues who revealed issuing loans of millions of USD by Royal Bank to 100 thousand Iranian citizens despite the banking and financial sanctions.

Among other things, disclosed in November 2010, the network project Wikileaks showed secret correspondence of former U.S. Ambassador to Azerbaijan Anne Derse, who shared suspicion of helping launder dirty money from Iran by several Azerbaijani banks, including Royal Bank.

Such a close relationship with the Bank of the Islamic Republic is likely to be associated with the personality of the main shareholder of the bank, a U.S. citizen of Iranian descent, Ali Jam. And just a couple of months before the CBA decision the Office for Combating Corruption under the Prosecutor General completed the investigation in respect of employees of one of the branches of the bank associated with the processing of false credit agreements.

Bankruptcy of Royal Bank also was the occasion of the insured event for Azerbaijan Deposit Insurance Fund. Through three banks - agents (Bank Respublika, MuganBank, AGBank) the selected ADIF insured depositors must be compensated 14.718 bn, whereas at the time of withdrawal of the license bank had liabilities of deposit totaling 58 million manat. That is about 75% of total deposits was not insured. For the record, we note that under the rules of the fund the maximum amount of insurance compensation to one contribution is 30,000 manat at a rate no higher than 12%.

 Most banks almost immediately reacted to this though minor, but still lower interest rates to attract deposits.

However, according to that same fund, at the end of September 36% bank savings by individuals accounted for by non-guaranteed deposits. Continuing the theme of deposits, we should recall that in June the government began to repay deposits of citizens of the Azerbaijan Republic in the former Savings Bank of Azerbaijan (in the Soviet Union) on 1 January 1992.

Payments are made through the offices of Capital Bank, the receiver of the former USSR Savings Bank in Azerbaijan. According to the Finance Ministry, savings accounts are in the names of 2.4 million people. According to estimates of the Ministry for payment of lump-sum payments to individual about AZN 1 bn is required. At the end of November this year 1,220,253 depositors were issued lump sum compensation for a total of 480.445 million manat. That is, in just five months, more than half of the investors received compensation, although the process will last until the end of 2013.

But perhaps the most significant event was the decision of CBA on 25 July this year on the increase from 1 January 2014 in the minimum total capital requirements for existing banks, and registered capital of newly established banks of up to 50 million AZN or five times. The reaction of the banks did not give in coming and the next day the shareholders of banks one by one announced plans to increase the total capital to the new regulations.

In the period from August to December of this year, the State Committee for Securities recorded additional share for a total of 221 million manat, and only in December - 93 million manat. As a result, in August and November, the total capital of the banking community grew by 15%, while the growth in the previous seven months was only 13 percent.

According to recent reports the total capital of banks was at 2,447.8 million manat, of which about 1.1 billion manat is the capital of PashaBank, Xalq Bank, Capital Bank, and IBA (about 600 million manat). The first two banks' capital is above 150 million manat, and the latter has more than one hundred million manat. Thus, the share of the remaining 39 banks account for just over half of the total capital.

It is difficult to challenge the decision of the CBA about fivefold increase in equity when there is a gap between the banks. The excessive saturation of the banking sector with not very competitive bank has been long talked about. There were supporters of radical measures such as those taken against RoyalBank, and regulatory incentives of bank consolidation. It is clear that the central bank initially followed the second path, and, most of all, this process is expected next year. The truth is not so optimistic, because most banks are either family-owned or attached to various agencies. Over the past years there have been no cases of bank mergers, even during the 2008 crisis. Some experts tend to believe that there will not be important mergers in 2013, and the entry of international institutions in the market by buying banks or equity is possible, but unlikely to be large-scale. Thus, we can say that the next year will be a life-changing one for some market participants, and for the sector as a whole. -15B -