PUT IN A WORD FOR POOR BANKS...

Over the past few years, the banking sector of Azerbaijan has made a great step forward in its development and won consumer trust, against all odds. People have learned to borrow money from banks, rather than friends, deposit their money, rather than keep it under the pillow, and pay using a bank card, rather than cash. This has helped this country to strengthen its financial sector and many of its entities to get positive credit ratings.  

However, the manat devaluation in February 2015 hit banks worst of all: the population's trust in them was somewhat shaken, the number of customers diminished and the amount of losses caused by the fall of the manat is anyone's guess so far. This is why virtually all leading banks have launched additional anti-crisis efforts today to regain both their reputation and customer base. 

Despite the fact that quite a long time has elapsed since 21 February when the Central Bank of Azerbaijan (CBA) decided to devaluate the national currency by 33 per cent, people in Azerbaijan are still waiting with anxiety for updated exchange rates of manat to the dollar and other foreign currencies. This is so because there are no and cannot be any clear-cut statements about stabilization of the rate at the current level while the outlooks being voiced are opposite poles. Some experts are sure that the manat to dollar rate is sure to reach the mark of 1.5 manats per dollar. Others, on the contrary, expect to see a one-for-one rate on currency tables.  

Meanwhile John J. Hardy, the head of the Foreign Exchange Strategy Department at Saxo Bank, believes that a stabilization of oil prices on the world markets could enable the CBA to avoid having to further devalue the manat.

"If oil prices stabilize, in my view, the Central Bank of Azerbaijan will prefer to avoid further revision of currency prices, which is understandable in the current context of a large-scale revision of oil prices. Further steps to revise the rate may essentially undermine trust and limit the wish to keep manat denominated assets," J. Hardy said. In his words, the manat devaluation stepped up the dollarization of the economy including the banking sector. "It should be understood that, after what happened in the market, reference will be given to keeping funds in US dollars rather than manats. This tendency will be especially obvious if the prices of energy supplies come under additional pressure," he emphasized.

In its recent report, the international agency Fitch Ratings also pointed out that devaluation of the manat, the national currency of Azerbaijan, will have a negative impact on the capitalization of this country's banking sector. Banks in Azerbaijan have "a large number of loans in foreign currency and are subject to losses on short currency positions", the agency's report reads. The strengthening dollarization of the economy and bank balance sheets "means that the currency risk in the sector will be essential not only in the short term, but also in the medium term", the report says. 

On the whole, the agency described the losses suffered by several banks from devaluation as "significant", given that foreign currency loans accounted for 27 per cent of all loans in the sector by the end of 2014 (about 33 per cent after the devaluation), which will lead to increased pressure on the banks' capital. This is why international experts advise that the market regulator - the Central Bank of Azerbaijan - should give breaks to some banks that will have problems meeting capitalization requirements. It should be said that, according to updated CBA statistics, the capital of four banks is below the required minimum of 50m manats but no instructions on their closure have been issued. 

However, according to Fitch Ratings, even International Bank of Azerbaijan (IBA) will need further support, in addition to that already received, to offset the impact of manat depreciation and restore its capital ratios. At the same time, Fitch does not expect IBA to suffer essential losses arising directly from adjustment of the local currency rate. 

Let it be pointed out that the IBA management has informed Fitch that the bank is going to speed up a new issue of capital totalling 100m manats of which 50m will expectedly be provided by the Ministry of Finance in March. Moreover, a meeting of shareholders on 2 April will discuss the possibility of an additional issue of common stock. Fitch expects that, in case of any delays in providing IBA with additional capital, its permit to depart from capital adequacy requirements will be extended. 

Meanwhile banks have made no statements as yet on the amounts of losses. However they are vigorously holding new campaigns to increase interest rates on deposit that were reduced basing of end of January results. Thus, by the end of the first month of 2015, the average rate on local currency deposits totalled 8.82 per cent vs 8.86 per cent as of the end of 2014. The figures for foreign currency deposits are 8.93 and 9.24 per cent, respectively. It is a good thing that the recent decision to increase from 9 to 12 per cent the maximum interest rate on deposits attracted by banks from the population and subject to insurance in Azerbaijan favours the introduction of "expensive" deposits. It should be admitted though that, back before the devaluation, the cancellation of tax breaks on profits from deposits caused "damage" to banks' deposit policies. Now some banks are trying to straighten out the situation and stop customer outflow by assuming the commitment to pay those taxes. 

As regards loans, the worst mess-up and discontent related to devaluation can now be seen in this segment of the banking business. Despite the fact that the decision to cut the manat-to-dollar rate by 33.5 per cent was taken by CBA more than two weeks ago, there are still no clear statements and mechanisms on how to regulate the issue of repaying loans taken in foreign currency. Let it be recalled that the regulator's only statement on this matter advised settling this issue judicially. It should be said that banks have now begun to make loan contracts with more care, clearly specifying nuances of this kind in advance to avoid disputable points in the future. However, it is also easy to understand the discontent customers who expected to repay their loans at the old rates and who took on liabilities on their loans basing just on those figures. At the same time, not many banks are voicing their wish so far to meet their customers half-way on this matter because, as was said earlier, they were hit by the devaluation themselves… 

In a word, the banks are trying to get out of this situation with dignity and avoid extra losses. Some even see business growth opportunities in the devaluation. For example, according to Taleh Kazimov, chief investment officer at Pasha Bank open joint stock company, the manat rate adjustment in Azerbaijan had no effect on financial stability despite 30 per cent of the bank's credit portfolio being in foreign currency. "Taking into account the current situation, we see great potential for own business development. Having analysed the situation and the impact of the weakening manat on our customers' business, we are going to take every conceivable effort to help them minimize the effects of devaluation," he said. At the same time, Kazimov does not view the population's anxiety as groundless because deposits are at issue. "Nevertheless, the government will support further development of the country's economy and growth in the incomes of the population the way it has been doing all along. In addition, the cheapening manat will make it possible to replenish the state budget and enable the state to carry on planned investment programmes which will again have a favourable effect on the population's incomes. I will say again that all these changes open up development prospects and incentives both for the banking sector and local business to do their job even better," he said. 

As Kazimov said, the country's economy has got quite strong over the past 10 years and now even more opportunities have emerged to develop local production and export and this, in turn, contributes to diversification of the economy.

Let it be recalled that President Ilham Aliyev earlier pointed out the need to step up the banks' operation with the real sector. Apart from all other things, the devaluation also proved to be a kind of test for the banking sector and it will identify its truly strong members. On the whole, a couple of months from now, the picture will become clear and we will get concrete knowledge of how properly likely risks are taken into account in the management of banks.