CONFRONTING THE CRISIS

Azerbaijan's banking system has experienced difficult times since the devaluation of the national currency in February. The situation has been made worse by all kinds of rumours about a possible "second devaluation wave", which clearly does nothing for the population's confidence in the national currency or the banks operating in the country.

In this regard it is particularly important to understand the positive and negative trends that have developed in the country's banking system over the past few months. It should not be forgotten that the banking system plays the role of "blood arteries", through which money flows to various sectors of the national economy, assisting their dynamic growth. Accordingly, "blocked arteries" could have a very negative impact on the rate of growth of the national economy.

For a long time now the rate of growth in the banking sector has been in double figures. The regulator - the Central Bank of Azerbaijan - has frequently taken steps to "cool" this rapid growth at a level of 20-26 per cent in recent years. There was nothing random about the CBA's alarm because this sizeable growth had come about by means of an increase in home loans (consumer credits and the acquisition of cars and property), the proportion of which by January this year had reached its maximum level of 44 per cent against the overall volume of allocated loans. However, along with a growth in lending there has also been an increase in the proportion of overdue loans. And it has become clear things will not be easy for the banking sector in the event of an outbreak of force-majeure circumstances.

CBA statistics also point to the tense nature of the situation: since February an outflow of deposits has been detected from the banking system with a lurch towards the dollarization of deposits.

Deposits of individuals at the end of July amounted to 7.6bn manats, whereas at the end of February this figure was 7.93bn manats. Moreover, whereas in July 2014 63 per cent of all deposits were in manats and 37 per cent in foreign currency, one year later these figures are 28 and 72 per cent respectively.

But a notable success of the CBA has been a reduction in the volumes of overdue loans as a result of a range of measures aimed at supporting the banks.

At the end of July the level of overdue loans in Azerbaijan's banking system was 6.4 per cent of the overall volume of allocated loans, down 0.2 per cent compared with the previous month. Since the beginning of the year the proportion of overdue loans has constantly increased.

It should be emphasized that the reduction in volumes of overdue loans should appreciably increase the confidence of the population and business circles in stabilization and an improvement in the country's banking system.

A toughening of the CBA's demands on the banks regarding their conditions for providing home loans has, of course, led to a reduction in the volume of allocated loans. Since the devaluation of the national currency the volume of bank loans has gone down from 20.697bn in February to 20.187bn manats in July.

Compared with February this year the volumes of home loans in July were reduced by 646 million manats, or by 7.7 per cent, amounting to 7.77bn manats. Thus, the ratio of home loans was reduced from 43 per cent in February to 38 per cent in July.

Correspondingly, the volume of lending to the real sector increased in this period, with the increase affecting all spheres - agriculture, transport, power engineering and industry.

At the same time, the situation with non-cash settlements has deteriorated. At the end of July the number of cash machines had been reduced by 18, and the number of charge cards - less than 6,000 - also went down for the first time since the beginning of the year.

In July there was a further wave of cash withdrawals by the owners of charge cards, which was linked with increasing rumours about a second wave of national currency devaluation. As a result, in July a record number of charge card operations was recorded: 7.359m operations totalling 1.124bn manats. And 80 per cent of the whole total of operations comprised cash withdrawals.  

If one bears in mind the confidence of the Fitch Ratings international agency in the potential of Azerbaijan's banks to confront the crisis, then the population's lack of confidence in the banks could be regarded as overstated.

"We believe that the capitalization of some banks will most likely experience pressure in the mid-term because of the increases in losses on lending. However, the majority of the Azerbaijani banks rated by the agency seem to have sufficient capital to withstand the direct impact of devaluation even in an extreme scenario of a reduction in the exchange rate of the manat by another 40 per cent," Fitch Ratings notes.

At the same time, in their report Fitch Ratings experts point to difficulties in the banking segment of the economy not just this year, but next year as well.

"The zero growth in lending in the banking sector this year, as well as the weak demand for loans, will continue into 2016. The further depreciation in loan portfolios, denominated in foreign currency, has been caused by most borrowers lacking access to foreign-currency revenues. In order to ease potential pressure on liquidity in the national currency, the CBA has since the start of this year been assisting the banks by purchasing dollars in exchange for manats. Some banks have violations of regulatory requirements for open foreign exchange positions, but they have obtained regulatory easing from the Central Bank," Fitch Ratings reports.

So, the situation in Azerbaijan's banking sector remains complex, but not critical. The regulator of the CBA's banking market is assisting banks that are in a difficult situation and the margin of safety is helping to withstand even a "second wave of devaluation".