CBA conceal problems in the banking sector

Central Bank of Azerbaijan (CBA) did not place statistical information on the web site for four months. By the time this issue came out, some data for two month still had appeared - on assets, general crediting, aggregate capital of banks. The CBA web site’s interface did change, but this a very long period for update. CBA’s statistical silence means that there are some problems in the banking system. What does give the reason for such supposition? The information about the currency resources of the country, the bank’s money supply, AZN rate against USD was placed on the web site. The problems related to dynamics of a money supply in quarter 1, 2013 are hardly possible. This is, probably, related to the bank indexes. For instance, since the end of last year we observe a rapid growth of retail crediting. CBA has even banned two famous banks from allotting consumer credits at the shopping malls. The growth of retail crediting is connecting with the government’s policy, which against the background of reduction of GDP growth wants t compensate this process through development of consumer demand in the country. In quarter 1, 2013 the growth of retail trade turnover was very high and constituted 47% of GDP produced during this period. Such a policy is understandable, but very dangerous, because it can lead to a new growth of bank debts. There is no information about the pace of growth of cash in economy and supposedly, share of cash in the money supply kept growing. The banks also need to increase the authorized capital up to 50 million AZN by early year. This is not the reason for agiotage yet. The triple growth of corporate securities at the stock exchange reflects this fact.

The banks change their activities and number of the banks, which are able to increase their authorized capital, keeps changing. Recently we were speaking about 20 banks, which will be out of the game. Now the number dropped to 10. According to the CBA recent information, by present only 17 banks failed to increase their authorized capital. CBA keeps calm, because according to its estimates, 80% of all assets of the banks are controlled by the banks, which have already increased their authorized capital. CBA also reported that the banks- outsiders conduct negotiations between each other and foreign banks on merger or full sale of their own assets.

The banks are permanently present at the stock exchange. They mainly issue bonds and rarely shares, depending on the goals, which the bank owners pursue. Bank Silkway, which is considered among the “family” banks, has issued the shares to the amount of 23,541 million AZN, but only one investor bought the shares. The authorized capital of the fund exceeded 90 million AZN, which is beyond dangerous zone. Buying of shares by only one investors shows that the shares of the bank’s owners have changed. Till now the shares in the bank were divided between Silkway and two physical persons.

There are concerns that this year the problems of the banks-outsiders will overshadow the remaining problems of the banking sector. Meanwhile, the most urgent problem today in the light of new projects of the government is reduction of the credit value and proper positioning of the banks at the market.

Pasha Bank acts more consistently here. It has already strengthened its position as the biggest corporate bank of the country. CBA has been negotiating with Pasha Bank on the new instruments for corporate crediting. CBA and Pasha Bank have just finished consultations on the issue of security in the project financing. The problem of pawn remains the key in development of the bank crediting. Even the bank itself did not expect that the negotiations could be so successful. Farid Axundov, chairman of Board of Pasha Bank, said CBA is going to change the norms of the project financing and expand its up to the level of the developed countries. He said the credit financing was based on the following CBA norms: project financing with the amount of 25-30 million AZN and even more should be secured from the first day. The banks investing capital into big projects must accept cash flow or evaluation of the funded project as a pawn. There should be special forms of financing of developing projects. It seems like that CBA is ready to solve these problems of Pasha bank and other investments bank, though it will be necessary to expand some articles of the Civil Code, in which a possible subject of the security is interpreted rather narrowly.

It is also very important that Pasha Bank starts expansion to the depressive regions of the country. The bank plans to open a business centre in Aran economic region, 18 districts of which have the highest unemployment (after Baku). Bank explained why it is going to open business centers, but not branches of the bank. The bank’s goal is to provide corporate banking services, while branches of the bank will give an impression of providing services to the retail market. This year business centers will be also opened in some cities of the country – Ganja and Zagatala. Pasha Bank has opened the only business centre of financial services only in Port Baku business centre.

Pasha Bank already has an experience of project financing of Atena diary plant, delivery of equipment for Norm cement plant and construction of Healthy Food bakery. Several more similar projects are in the bank’s portfolio. The bank will also promote project financing in Georgia through its daughter bank in this country. It is hard to judge how it services its mother holding, but orientation to the concrete realistic projects is obvious here.

IBA had impressive results in quarter 1, 2013. Its deposits increased by 47% and its net profit increased by 70%. By April 1, 2013 the assets of the leading bank of the country totaled 6,227 billion AZN, while credits 4.02 billion AZN. The bank’s aggregate capital increased up to 746.66 million AZN with the authorized capital of 331.4 million AZN. The bank’s net profit totaled 12 million AZN with the incomes of 113.8 million AZN. The bank also plans to pay dividends for last year and allocate 28.5% of net profit for it.

The bank administration especially emphasizes improvement of the bank’s indexes, because of the planned sale of state share in the bank. It could be sold at a higher price now. The profitability has also improved – profitability (ROA) of the assets constituted 0.2%, while profitability of own capital (ROE) - 2.16% against 0.14% and 1.77% in April 2012. One should bear in mind that many state projects are implemented through IBA and major part of SOCAR’s accounts as well as short-term deposits are placed in the bank.

It is also hard to overestimate the institutional role of the banking system in economy or possibility of solution of part of social problems of the society. This can be noticed in the efficiency of the project financing of new enterprises, which is demonstrated by Pasha Bank. Active banking system is able to support majority social-oriented projects. In addition to the privileged address crediting, this is creation of new well-paid jobs and supply of population with the accessible housing. The banks orient themselves towards creation of new industry and economically active population. The possibilities of the financial sector of the country are enormous, if there are oncoming steps from the state. The idea to build construction-mortgage banks has been discussed for many years. In Germany, when a certain sum of the deposit for purchasing of the house is reached, the remaining sum is guaranteed by the state.

It is hard to say why the government refused to introduce the social housing, though only in Baku demand in new housing is estimated at approximately 15 sq. meters. It could have helped low-income families and pushed the housing market. The recent discussion of the accessible housing program by the CBA is optimistic. It has shown several new possibilities (including providing free land plots for construction), though one should bear in mind power of the monopoly groups, which are opposed to any innovations at the market. But implementation of many projects is possible only through assistance of the state. For instance, development of municipalities, which have no real assets and incomes, is the goal of the state. In this context construction of the municipal housing, which is applied around the world, looks hopeless in our country. The government should learn to borrow money for infrastructure through the loans. Right it is prefers to invest money for the projects from the budget. This is also necessary, because the budget must be more conservative. This year the budget will not be even revised, as it is done every year.

In other words, the government and the regulators are not in hurry to expand the financial instruments and introduce new forms of borrowing. Since early year all talks around a narrow set of securities and if the Finance Ministry returns to the stock market to ensure growth of this market. Even chairman of the State Securities Committee did not believe that the Finance Ministry will return to the Baku Stock Exchange earlier than mid-year.

In early May 2013 the Finance Ministry returned to the stock market. On May 3, 2013 it issued state short-term bonds with total value of 20 million AZN. Annual volume of issue of securities will total 180 million per each security. Therefore, total volume of issue of securities of the Finance Ministry will reach 3.04 billion AZN, of which 2.5 billion AZN will fall to the notes of the CBA.

In early year we witnesses a small reduction of the credit rate. This process continued in quarter 1, 2013. But many banks increased the deposit rates and this always blocks reduction of the credit rates.