The situation in the banking sector is improving

Central Bank of Azerbaijan (CBA) claims that in quarter 1, 2013 the money issue increased by 2066% (up to 172.6 million AZN) against the same period in 2012. By April 1, 2013 in average 1,919 million AZN a day was put into circulation against 0.093 million AZN a year earlier. The turnover cash outside the banks decreased by 2.95% since early year to 8 billion 983.9 million AZN. One can say that money mass narrowed since early year. By early May 2013 a wide money supply increased by 0.87%, M2 – by 1.56% and M1 – by 0.2%. This explains the current situation at the stock market, where interest in the Central Bank’s notes and short-term bonds issued by the Finance Ministry diminished. On the other hand, the banks are the most active buyers of these papers, but now they have no free money, because they themselves are active issuers of corporate bonds. On the other hand, there is no an urgent need in sterilization of a money supply.

Meanwhile, the bank crediting is coming back to life gradually. During the first two months it was at the level of early year, which means that there were almost no new credits. But it started growing in March and during April it increased by 4.3% against previous month and by 6.8% against early year.

The level of overdue bank debts remains approximately the same. The banks’ suits against the borrowers have significantly increased. As a rule, big banks deal with big borrowers and IFOs criticize such a consolidation. It is considered that it increases the risks. For instance, according to last year’s estimates, about 342% of the first level capital fell to 10 big borrowers of International Bank of Azerbaijan (IBA).

Situation in the Azerbaijani banking sector is getting better, because the banks are forced to increase their minimum authorized capital, which makes them more active. In quarter 1, 2013 number of unprofitable banks decreased to four. They completed their activity with the losses of 6.92 million AZN. Their number decreased to four against January-March 2012 and total size of their losses decreased to 48.5%. During quarter 1, 2013 net profit of the banks increased by 58.3% to 78.08 million AZN. In quarter 1, 2013 banks’ resources dropped from 851.6 to 805.1 million AZN. Last year these indexes were lower, but they grew faster.

The share of credits (5.8%) in the structure of the banks’ assets (18.5 billion in quarter 1, 2013 with the growth of 4.8% against early year) increased. There was decline of correspondent accounts and investments, but the cash grew faster (growth by 16.4% up to 815.5 million AZN). Central Bank of Azerbaijan (CBA) and the Taxes Ministry are concerned about that and are going to take urgent measures. CBA has already drafted the law on development of cashless settlements, which will be submitted for the consideration of parliament in autumn. The law on private credit bureaus, adoption of which is delayed, also must help to the process of crediting of economy.

They say that the idea to increase minimum authorized capital banks by five times belonged to Jangir Hajiyev, chairman of IBA, whose positions have significantly increased, according to the bankers’ unanimous opinion. The bank sector had to be consolidated sooner or later, but we should not forget that clients of 10-15 banks, which can drop out of the game, will transfer their deposits to such banks as IBA. There are also fears that reduction of the banks’ number could strengthen the monopolies. Small banks, which will drop out of the games, where connected with certain economic groups. If they leave the market, then those economic groups will get weaker. It is hard to believe that, but there is information in press that right after January 1, 2014 authorized capital of the banks could be increased again. It shows that the banking system is a reflection of the general process of strengthening of centralization in economy.

The banking system is always in sight. But many processes in it are hidden. For instance, foreign audit of Texnikabank has just recently proved that the bank was on the verge of bankruptcy. With a significant support of CBA and increase in the authorized capital by 100 million AZN, IBA has improved its indexes. Moody’s has recently increased its rating from negative to stable. IBA’s share at the bank market gives it huge preferences, but at the same increases risks. The agency emphasized that if privatize, IBA could lose part of its stability, which was based on support of the state. The forthcoming growth of authorized capital also brings up the issue of value of the banks, which will have to either merge or leave the market. For instance, not long ago in Russia average market value of the bank could be several times higher, than its aggregate capital, but now it corresponds to it. Some bankers say that such a reduction of value provokes interest in purchase and mergers, but at the same time makes the banks less active in development of new bank products.

CBA started thoroughly monitoring situation at the markets. CBA stated that in quarter 1, 2013 turnover of the market of residential property in the country increased by 40.1% against the same period last year and totaled 882,751 million AZN. In 2012 it increased by 24.86% against 2011 and totaled 2,828,197 AZN. This information is based on the analysis of the notary offices’ accounts of purchase/sale of residential property by physical persons, which totaled 390,815 million AZN against 259,715 million AZN a year earlier (+50.48%), and 491,936 million AZN was charged off the accounts against 370,232 million AZN (+32.87%). It is surprising that during quarter 1, 2013 incomes of the mediators, including notary offices, realtors and banks, from the residential property deals decreased by 8.5%.

CBA also tries to take upon itself the functions performed by the central banks in many countries of the world. These are two key issues – ensuring economic growth and employment through the macro-economic levers. Inflation rate remains rather law and this is a good time to work out such mechanisms of economic growth and employment. It is important to expand monitoring of economy. CBA recently said that it carries out monitoring in line with the standards approved in EU member-states.

Monitoring of the real sector carried out by CBA among 300 companies showed that the employment situation is rather stable and tends to grow. The construction area, where in 2010 the employment dropped to -80%, increased up to +50% from March to April 2012, then dropped to-50% in December-January, reached -5-10% by April 1, 2013. The services sector, where employment reached 40% in April 2010, but dropped to -30% in February-March 2012, reached 0% by April 1, 2013. The trade sector, which had -25% peak in September-October 2010, has the employment index of slightly higher than 0%. In the industry index increased from -25% in January 2010 to +10% in September 2012 and now it is +1-3%. The State Statistical Committee said that employment grows in the state service sector, where number of employees increased from 12,00o up to 30,000.

In May State Oil Fund of Azerbaijan (SOFAZ) became shareholder of Russian VTB bank. Azerbaijan has joined a group of investors, which includes sovereign funds of Azerbaijan, Qatar and Norway. They are going to buy shares during the additional issue of VTB. In February 2011 the bank sold 10% shares and then it will sell two more packets of shares of 10% and 15%. The Russian government plans to completely sell its share in the bank by 2016. As a result of the current additional issue, share of the state in the bank will be decreased from 75.5% to 60.93%. Azerbaijan is going to invest about $500 million into purchase of VTB shares. The specialists believe that there is risk, because Russia and Azerbaijan have not signed the agreement on mutual protection of investments.

If the government is going to reduce dependence of economy on oil, it needs to adjust the monetary and credit system of the country, create cheap capital market for the new needs of economy and develop the financial system. However, these areas are inadequate to the set tasks even today.