THE CLEANING CONTINUES

Perhaps, the summer season has never been so hot for the Azerbaijani banking sector as this year – not yet had time the depositors of Bank Standard to put up with the process of "healing" the bank and the problems associated with deposit refunds, as the customers of other four banks were overtaken by the news about the withdrawal of licenses. Rufat Aslanli, COB of the Financial Markets Supervisory Chamber (FMSC) has announced that on July 21, 2016 FMSC decided to revoke the licenses of Dekabank, Kredobank, Parabank, and Zaminbank.

The decision about revoking the licenses was the Chamber’s first decision made within such a short period of activity. These functions have previously been performed by the Central Bank (CBA).

According to Aslanli, the main reason was the fact that bank assets had not been categorized in accordance with the regulations. Also, the banks had not had adequate reserves and their aggregate capital had not met the minimum regulatory requirements of 50 million AZN. "In general, they had not complied with the regulator’s written instructions", said Aslanli. He added that the closure of these banks would reduce the risks in the banking sector, strengthening financial stability and increased confidence in the banks.

However, this step was necessary and useful in terms of the recovery of banking sector. Indeed, the market has been seriously saturated as the local economists and international financial institutions had reported this back in the pre-crisis years, advising to limit the number of local banks to 9 or 10 given that they are strong enough. But CBA had not taken drastic measures, extending the terms of performance requirements to increase capitalization. The situation has changed dramatically after the second devaluation of the manat in last December – the troubled banks had to be eliminated as soon as possible, otherwise they would "corrode" the entire system, which had already been shaking after some serious irregularities had been found at the country's largest International Bank of Azerbaijan (IBA).

Currently, there are 33 banks licensed to operate in Azerbaijan. Since the start of 2016, the licenses of six banks have already been revoked including AtraBank, Caucasus Development Bank, Texnika Bank, Ganja Bank, Bank of Azerbaijan, and the United Credit Bank.

In any case, the insured depositors of the closed banks have nothing dangerous to worry about their deposits. According to Aslanli, both the Chamber and ADIF have conducted serious preparatory works to refund the deposits. "The Fund has sufficient funds for this but, if necessary, it will request CBA for additional funds", said Aslanli.

By the way, that is what the Fund is going to do, according to its Chairman Azad Javadov. As the liquidator of the closed banks, ADIF will first assess the assets of these banks. According to Mr. Javadov, the amount of deposits in four banks reaches 187 million AZN of which 127 million AZN will be compensated to depositors. About 80% of these deposits are in foreign currency. ADIF currently holds nearly 26 million AZN, therefore, a loan of 100million AZN will be requested from the Central Bank.

A similar case has already taken place when ADIF drew 22 million AZN from CBA in March 2016 and plans to repay before the end of this year. Additional funds were required to compensate for insured deposits of the former depositors of Bank of Azerbaijan, Ganjabank, and Texnikabank amounting to almost 145 million AZN.

The customers are not so much concerned about the elimination of small and weak banks as the real situation in major banks, especially after Bank Standart followed the problems at IBA. By the way, IBA is still the largest national bank while Bank Standart is the second among the top five. Since May 3, 2016, FMSC has introduced a temporary administration of Bank Standard, as the bank had experienced problems with assets and liquidity while the shareholders had not had sufficient financial resources to remedy the situation.

As for the IBA, Aslanli says that the closure of this bank is "out of the question".

As previously reported, the volume of troubled assets at IBA had totaled more than 3 billion manats. Also, the bank's former management is accused of large-scale financial fraud, and is currently awaiting court trials.

Mr. Aslanli has assured the media that at present, there is no other troubled banks but IBA and Bank Standard.

Nevertheless, it should be noted that the situation in the financial sector is changing fast enough: the exchange rate of manat is trying to establish a balance, the weight of bad loans is still high, and the rating agencies keep forecasting negative predictions about the banking sector. Another problem is that the banks demonstrate a rather passive attitude towards the possibility of combining assets, despite having enough success stories in the past. Suffice to recall that the popular banks Unibank and Bank of Baku had emerged as a result of consolidation. According to the expert economist Farhad Amirbayov, any association involves merging not only good but also bad assets. "The presence of bad assets on the balance sheet of any company is a normal phenomenon. The consolidation does not mean that only the banks with bad assets merge. This enables very stable banks that are deliberately go for consolidation to increase the market share and to prepare for future growth, resulting in more revenue. This strategy aimed not at the profit growth but the growth in market share would be more correct", he said.

Given that the international financial institutions are willing to participate in this process, a decision to merge the assets could be a solution not only for individual market players experiencing hard times but also for the entire sector and the regulators, as it would help get rid of the "weak players" using the less painful methods. Since the situation in the banking sector directly affects other segments of the financial market, these independent initiatives focused on capital improvement would save jobs to many insurers and brokers.

As far as the customers of banks are concerned, both the experts and the ADIF chairman Azad Javadov recommend keeping the deposits under the terms of insurance. "If someone has a deposit contradictory to the terms of insurance, he or she should go and change the contract with the bank. The bank has no right to refuse a client in updating these conditions, it can only fine this client or refuse to pay an interest if the deposit is withdrawn before the specified time", said Javadov. The bank's financial performance should not disturb the insured depositors.

Most likely, the Chamber, CBA and the banking sector in general are going to review the maximum rates on bank deposits covered by the deposit insurance system to increase confidence in banks given the ongoing negative events and willingness to maintain deposit portfolios at an effective level.

In any case, this summer will certainly be remembered by the bankers and financiers.