MORE MONEY, LESS RISK

The need to step up competition in the market has already required Azerbaijani banks to expand their list of services and to update their technology. Many of them have started offering leasing operations, mortgages and consumer credit. Also, trying to maintain the level of revenues from credit, banks have increased the volume of credit for industry, trade and services and have started to develop their retail business more actively. The banking retail business actively developed last year as banks branched out, offered new credit products and competition intensified in the attraction of deposits.

The latter became possible as the population's trust in banks increased - the volume of deposits is steadily increasing compared with last year. Competition for hi-tech services is also intense (plastic card operations, instant money transfers and so on). This gave a significant impetus not only to the development of these operations, but also to technical modernization and rearmament in all spheres of banking activity - new technology, software and of course, the material base.

But these are only few examples. The National Bank of Azerbaijan (NBA) is continuing to set new targets for improvement for local banks.

Withstand the competition

This year the NBA announced its decision to increase the refinancing rate from 9.5 per cent to 12 per cent. This initiative will increase the effectiveness of anti-inflation measures, since the NBA is trying to influence the amount of money supply in the country, i.e. it is reducing the demand from commercial banks for money and credit, experts believe. As a result, banks reviewed their policy in both active and passive operations, which, in turn, sharpened competition in the struggle for customers by expanding the list of services, as well as by developing and improving banking technology.

In other words, today all banks are more active in financing the Azerbaijani economy. Statistics show that banks have significantly expanded their credit in the last two years, although the banking sector is still not capable of meeting the demands of large businesses and, at times, even medium-sized businesses. The reason is that the current pace of growth in the banking sector does not match the growing demands of the country's economy. Yes, the banking sector is still not a full source of economic growth, but we think that the banks will easily succeed in this task. It is another matter that all the aforesaid tendencies testify to a very important challenge facing Azerbaijani banks - to be able to compete not only among themselves, but also with state-owned banks, and even more important, with branches of Western banks - for example, the same German Commerzbank, which is planning to open a representative office in Baku. Of course, only banks that have modern technology and sufficient capital will be able to compete with these organizations in credit. It is precisely for this reason that the National Bank is constantly continuing its policy of toughening its requirements for banking capital. It must be remembered that the minimum requirement increased from 8.2m to 10m manats on 1 July this year.

How banks amalgamate

In early February this year, the NBA was seriously concerned that a whole number of banks would not be able to fulfil the minimum capital requirement. At the time, only 11 of the country's 43 banks met the requirement of 10m manats, and the general director of the NBA, Rufat Aslanli, said that "there may be doubts only about the ability of six or seven banks to meet the new demand in time". But the National Bank carried out stress tests, the results of which showed that the banking system was steady. By 1 May, 25 banks had capital that was below the required level, including four banks with capital of less than 5m manats. The average size of capital was 16.48m manats. In May, i.e. one month before total recapitalization, the NBA noted that only five or six banks in the country had problems meeting the minimum capital requirement. This fact did not disturb financial experts at the National Bank. It still does not disturb them, which is proved by the fact that after recapitalization the situation on the financial market will be thoroughly analysed, and "perhaps the practice of increasing the minimum capital requirement will be continued", Elman Rustamov said.

In other words, the National Bank is not going to ease up. We have to say that Azerbaijan's banking community totally supports the policy of the National Bank on this issue. Even though it is a commonplace, it is still a fact that the higher the level of capitalization, the better position a bank has on the market, i.e. in this situation when competition is getting more intense in the country, "the strongest survive".

Of course, this also plays into the hands of rank-and-file citizens, many of whom have entrusted their money to banks. According to statistics, the resource base of banks grew considerably in 2006 due to private deposits. At the same time, competition in the market for private deposits is increasing as well. That is to say, the banking community itself is interested in the stable functioning of the financial system. We should point out that at the very end of 2006 a law, "On the insurance of deposits" was adopted in our country. Sooner or later, this will have a considerable influence on the development of competition in the banking sector. The main purpose of the law is to guarantee that citizens will get their money back if commercial banks go bankrupt. Depositors who open accounts in banks with an initial deposit of more than 4,000 manats are already able to obtain insurance. But at the same time, the law stipulates the mandatory participation of banks in the Deposit Insurance Fund (DIF), which will include only those banks which meet not only the level of corporate management, personnel and information technology, but also capitalization.

It was initially planned that the DIF would come into operation in August this year. However, we found out in March that this organization will not appear before 2008. The first meeting of the DIF observation council was held at the end of July. The council outlined a number of important tasks, including the issue of the residence of the fund. A package of documents for state registration at the Ministry of Justice has almost been completed.

Task Number One

As we can see, increasing the level of capitalization is a very important task, which is why the National Bank is continuing its work to improve the ability of the country's banking system to meet the needs of a growing economy. The main aspect here, we should stress, is the sufficiency of the capital of credit institutions. At the same time, the NBA thinks that the situation, whereby not all the country's banks managed to carry out recapitalization by early July, is not so terrible. "Almost all banks are steady enough to meet the requirements of the NBA, which is proved not only by our research, but also by the interest of foreign banks in participating in the capital of local credit institutions. The NBA has registered a stable growth in this interest," the National Bank stresses.

We should point out that several banks already include foreign investment in their capital. Such deals prove the high rating of the banks themselves and the country's banking system as a whole. We can suppose that the inflow of foreign banking capital to Azerbaijan will continue to grow. The development of market institutions, the lack of political risk, regulatory reforms, the growth in foreign investment and the development of new Azerbaijani business will promote this. We think that after all "formalities", in the form of 10m mantas, are observed then this tendency will increase even more.

It cannot be ruled out that the continuing policy of the National Bank to toughen its requirements on the level of capitalization will lead to the amalgamation of Azerbaijani banks. It is clear that the banks will be seeking opportunities to increase capitalization and expand their business through all sorts of mergers and takeovers. Moreover, serious competition in the market, and the possibility of major banks providing complex services with relatively low rates, will lead to the further outflow of clients from small banks. At the same time, the development of retail business will remain a priority sphere for Azerbaijani banks in the next few years. But to this end, there is a need for a developed retail network, and expenditure on its development total tens or even hundreds of millions of dollars. For this reason, not all banks will be able to create competitive retail sectors, which will widen the gap between large and small banks even further.

P.S. The capital held by the country's banking system is steadily growing. On 1 May this year, it exceeded 819.78m dollars. On 1 May, the capital of Azerbaijani banks totalled 708.7m manats against 669.9m manats on 1 April and 603.3 manats at the beginning of this year. According to the NBA, although the requirement is 8.2m manats, four banks had capital of 3.5 to 5m manats on 1 May, 21 banks - 5 to 10m manats and 18 banks - more than 10m manats.

By 1 May, the growth in the total net profit of the banking system totalled 43.18m manats. The banks' income after paying taxes totalled 37.33m mantas, against 23.58m in the first quarter of 2007 and 49.08m manats in 2006. The income before paying taxes totalled respectively 43.11m manats against 28.91m manats and 71.63m manats. At the same time, 36 banks had 43.92m manats in net profit after paying taxes, with seven banks losing 6.59m mantas, against 35 banks with a net profit of 33.11m mantas, with eight banks losing 9.53m manats and 30 banks with 62.08m manats in revenues, with 13 banks losing 13m manats.

By 1 May 2007, the net profit of the country's banks from interest rates totalled 85.06m manats against 62.58m manats in the first quarter of the year and 27.5m manats in 2006.