LAST MAY FOR GUNAY BANK

On May 17, 2023 the Central Bank of Azerbaijan (CBA) annulled the license of one of the oldest commercial banks of Azerbaijan, Gunay Bank OJSC. The decision caused a deja vu effect among the experts, as the CBA adopted a similar decision on May, 2020 in relation to four other local banks—Atabank, Amrahbank, AGBank and NBCBank. Reasons are the same: problems with capital and low solvency.

In its first statement after the decision, the CBA reassured former customers of both this bank and others that the revocation of Gunay Bank's license does not pose a threat to the financial stability of the banking sector. "The share of Gunay Bank in the assets of Azerbaijan's banking system is 0.6%, while in the loan and liabilities portfolios is 1% and only 0.5%, respectively," CBA noted. The regulator has already started inspections of Gunay Bank's insurance subsidiary Gunay Insurance, which, like the bank with the same name, was established back in 1992.

Thus, there are currently 24 banks in Azerbaijan. But how long will this number stay the same?

Figures and facts

According to CBA, Gunay Bank's licence was revoked because its total capital did not meet the minimum required level, with total capital adequacy ratio less than 3%, which rendered the bank's current operations unreliable.

Interestingly, according to the bank's financial statements as of April 1, 2023, its total and share capitals were almost ₼68m and ₼65m, respectively, with the adequacy ratio equal to 29%. Given that CBA considers total capital of ₼50m as a norm, it turns out that the bank was providing false information, which was determined during the inspection by the regulator.

According to financial statements, in January-March 2023 the bank reduced its assets by 2.5% to ₼274.3m. At the end of March its loan portfolio was at ₼201m and liabilities at ₼206.3m. Yet, the bank should repay its liabilities to credit institutions (₼90.1m) in the first place.

As for individual depositors, Gunay Bank is a member of the Azerbaijan Deposit Insurance Fund (ADIF). Therefore, individual deposits insured with the bank will be compensated as stipulated by relevant law. ADIF has been appointed by a court decision as the bank's liquidator. The fund has already announced the start date of compensation payments: June 19.

CBA stated that according to reports submitted by Gunay Bank to ADIF, as of the end of 1Q2023, the volume of insured (reimbursable) deposits reached ₼38.5m. "Please note that the deposits of 99.9% of Gunay Bank's depositors will be reimbursed," CBA statement reads.

The first reaction to this statement is "what a record compensation rate!" Yet, a closer look reveals some interesting details.

According to reports, as of April 1, 2023, the total amount of deposits in Gunay Bank was ₼108.566m, of which ₼73.5m was the deposits of individuals. What about the remaining ₼35m of this amount? How is it possible that the amount is missing from calculations?

Apparently, there were several individuals that kept millions of manats in the bank, said Vugar Bayramov, a member of the Milli Majlis.

"Under the current insurance system, the individual bank deposits of up to ₼100,000 are insured. The insured interest rate for deposits in national currency is 12% and in foreign currency is 2.5%. ADIF compensates protected deposits, while unprotected deposits are held by the bank. In an insolvent bank, unprotected deposits can be repaid if assets exceed liabilities," Bayramov said.

This is a strange situation. It would be wrong to assume that the license revocation came as a complete surprise to Gunay Bank's management. Immediately after the CBA's statement, bank's chairman Baratali Piriyev admitted in his interview with Report that they had received warnings due to existing problems, including small aggregate capital. He added that the next general meeting of shareholders was scheduled for July 5, when they would discuss the issue of increasing the share capital. Did the management of Gunay Bank warn its major depositors about the problems and their possible consequences? We do not think so.

Statistics show that the process of taking deposits actively continued even when the CBA diagnosed Gunay Bank's situation as unstable.

The issue of whether the regulator should have made a public announcement about the seriousness of Gunay Bank's deficiencies before adopting a final decision on the revocation of its license was discussed three years ago, but no consensus was reached. In fact, bank's customers had a right to learn about the existing risks. Yet the CBA governorship believed this was impossible, as such information would have damaged the image of both Gunay Bank and the bank sector, also undermining the credibility of the bank.

Unlike the millions-worth deposits, deposits on Gunay Bank's payroll cards will be compensated by the Deposit Guarantee Fund in accordance with the law.

One is not for all

Depositors of other small banks in Azerbaijan are now wondering who is next on the list of the CBA? However, based on the above, it is impossible to answer the question. Experts have no doubt that the process will continue.

"There are some banks that may close... The number of banks has dropped from 45 to 24 in the last ten years. In the coming years, this number will drop below 20. This downward trend amid the global introduction of blockchain technology also demands this," economist Samir Aliyev said.

During his last press conference, CBA chairman Taleh Kazimov also openly expressed dissatisfaction with the state of the banking market. "If you ask me if I am satisfied with the overall state of the financial sector, I would say no. I would like to see more best practices in terms of risk management and corporate governance by the participants of the financial sector," Kazimov said. He also admitted that some banks have problems with their financial performance, but they are not systemically significant. "We are currently working with these banks. I consider the overall condition of the financial sector to be satisfactory. The quality of the loan portfolio in the sector is also satisfactory. The share of non-performing loans in the portfolio is only 3.7%," he added.

In fact, Kazimov announced upcoming events in the market. Given that he referred to troubled banks in plural, it is clear that there are candidates for elimination.

Recently, CBA restricted the operations of the Baku branch of the National Bank of Iran (Bank Melli Iran-Baku).

It is reported that the regulator has requested the bank in writing to suspend all banking operations except withdrawals from accounts. The reason for decision has not been made public yet, but we can assume that the situation is different than with Gunay Bank.

However, ordinary depositors can easily draw conclusions about a bank's credibility, as financial statements are generally publicly available, same as the rules and prudential regulations of the regulator. These two sources can provide a relatively realistic picture of the situation.

Again, the bankruptcy of one bank does not at all indicate a system-wide problem. On the contrary, the general statistics of the sector is quite favourable. Thus, as of May 1, assets of Azerbaijan's banking sector reached ₼45.6b, which is 13.5% more than as of May 1, 2022.

During the reporting period, liabilities of the banking sector liabilities increased by 13.1%, including a 13.1% increase in the deposit portfolio. Over the year, household and corporate funds in banks increased by 17.2% and by 13%, respectively.

Last year, the liabilities of financial institutions to the CBA decreased three times reaching ₼108.6m, while the sector's balance sheet capital rose by 16.5% (to ₼5.8b). Net profit also increased by almost 40%.

International financial institutions have repeatedly acknowledged in their reports that Azerbaijan's banking market has proved surprisingly resilient to external shocks, surviving a coronavirus pandemic and calmly weathering the consequences of the Russia-Ukraine war.

This information is also reflected in the International Monetary Fund's regional economic outlook report for May 2023. However, the report also notes that "banking supervisors should ensure that banks' governance and risk management systems are aligned with their risk profiles".

Obviously, the recovery of the banking sector will continue. Smaller banks that should meet the regulator's target indicators need to take the seriousness of the situation into account, while customers need to improve their financial literacy and keep a close eye on the news.