Caliber.Az tots up year's results in Azerbaijan's banking sector Achievements and challenges

The end of December is a traditional moment for summing up the results of the year, including an assessment of the state of the financial and economic spheres. In this regard, Azerbaijan's banking sector showed positive trends in very difficult 2023. Domestic credit structures closed the 11 months of the current year with a 16 per cent growth in net profit, increased capitalisation and, most importantly, a noticeable increase in the volume of credit investments in the country's economy. The data published the day before by the Central Bank of Azerbaijan and the reports of leading international rating agencies - S&P Global Ratings, Fitch Ratings, and Moody's Investors Service - confirm the stability of the banking system.

During the current year, the banking sector in the United States, the European Union, Russia and several other countries has been affected by the global recession, which has slowed down the development of the economies of many developed countries. Fortunately, largely due to modern and competent measures of the Central Bank of Azerbaijan (CBA), which strengthen the prudential stability of the financial sector, the impact of this external negative influence on the financial sector of our country was minimised. In general, during the current year, the domestic banks have increased their portfolios of loans and deposits, increased their assets, strengthened other basic indicators, and fortunately, no serious risks for the sector have been identified.

The CBA, which is taking consistent measures to rescue the credit market, is identifying its weakest links in a timely manner; in particular, the licence of Muğan Bank OJSC was revoked in October. The volume of this bank's total capital was below the minimum required by law, and the OJSC's total capital adequacy ratio was below 3 per cent. The reasons for the bankruptcy also included the structure's inability to carry out current activities in a reliable manner according to prudential rules and inadequate internal management and control procedures. However, the move was not critical for the country's financial sector, which has 23 licensed banks as of November 30, 2023, as the bankrupt bank's market share in the total assets of the country's banking system was only 1.4 per cent. The negative aspects of Muğan Bank's closure include only a reduction in the number of bank branches and subsidiaries (a 2.7 per cent decrease compared to 2022), as well as an indirect impact on a 1.9 per cent decrease in the total assets of the banking system, estimated at more than 46.172 billion manats ($27 billion) at the beginning of December.

The majority of other fundamental indicators of the banking sector are also on a steady growth path. According to data published the day before by the Central Bank, the key indicator of banks' efficiency - activity in the credit market - shows very good momentum. Thus, the total portfolio of banks' loans at the beginning of December amounted to nearly 22.882 billion manats ($12.9 billion), up 16.8 per cent compared to the same period last year, and the share of loans in assets increased from 40.6 per cent to 46.6 per cent. Acceptable prices for energy resources on foreign markets, persistent trade and balance of payments surpluses, as well as large-scale state financing of projects for the revival of the Karabakh region, are acting as a driving force for stimulating the activity of the non-oil private sector and thus supporting the demand for bank loans. This is evidenced in particular by the 14.4 per cent increase in the business loan portfolio to over 12.421 billion manats ($7 billion).

The most important condition for the stability of the Azerbaijani credit market is the balance of the basic macroeconomic parameters, first of all, the monetary one. In contrast to many of the trading partners of the Azerbaijani state, the manat-dollar exchange rate did not change for seven years in a row, which ensured the stability of the credit and deposit sector. All these factors have contributed to the banking sector's resistance to external and internal pressures.

The tangible growth rates of banks' loan portfolios are a contribution to the solution of the problem of the turnover of funds in the banking system, and at the same time, they have not led to a sharp increase in toxic loan debts. Thus, according to the CBA data for the first eight months of this year, the ratio of non-functional loan portfolio to the total loan portfolio was 3.6 per cent. To compare, in the crisis year of 2016, this indicator in Azerbaijan reached a critical level of 21 per cent. The regulator is also successfully controlling the banks' capital adequacy indicator: In international practice, this indicator is considered normal when it is 8-10 per cent, while in Azerbaijan it reaches 18 per cent. In turn, the indicator of instant liquidity should not be lower than 30 per cent, but today it is 60 per cent in our country, so banks operate with sufficient liquidity, which is important, among other things, for the return of depositors' deposits.

As for household deposits in particular, it should be noted that their volume increased by 6.7 per cent, exceeding 12.253 billion manats ($7 billion) by the end of November this year. At the same time, the level of dollarisation of deposits of individuals and legal entities in banks in Azerbaijan for three quarters of 2023 was estimated at an unprecedentedly low level of 32.4 per cent. For comparison, at the end of 2022, this indicator was 44.9 per cent, and at the peak of the devaluation crisis in 2015, the volume of deposit accounts in dollars and euros reached a peak level of 85 per cent. These facts testify to the confidence of the population in the national currency and the banking system as a whole.

Other indicators of the regulator's banking statistics for the period under review are also positive: in particular, the total capitalisation of banks in Azerbaijan exceeded 6.012 billion manats ($3.5 billion), representing a growth of 6.9 per cent; in turn, the total net profit of banks in January-November increased by 16 per cent to 997.4 million ($586 million); and the interest income of banks increased by 28.6 per cent to almost 3.178 billion manats ($1.7 billion). Non-interest income of banks also grew by 12.8 per cent to more than 1.215 billion manats ($705 million), while the operating profit of the credit sector exceeded 1.521 billion manats ($882 million) with an increase of 22.7 per cent.

In addition to the CBA data, the positive changes and stability in the banking sector have been confirmed by the studies of three leading international rating agencies. In October, for example, Fitch Ratings revised its 'B+' operating environment rating outlook for Azerbaijani banks from stable to positive, reflecting expectations that financial stability in the highly cyclical Azerbaijani economy will continue to improve. "The stronger financial profiles of Azerbaijan's banks and the regulator's tighter oversight are also leading to a mitigation of legacy asset quality risks," Fitch Ratings said in the report.

Recently, international agency S&P Global Ratings noted that Azerbaijan's banks are not seriously dependent on external funding markets. According to S&P's estimates, our banking sector is more focused on the emerging domestic debt market and its deposit base and is now a net external creditor. By mid-2023, the external debt of the Azerbaijani banking system will amount to about $1 billion, and it will mainly consist of funds from international donor structures such as the International Finance Corporation and the European Bank for Reconstruction and Development. This configuration makes the domestic banking system more stable and less exposed to external risks. S&P's experts highly value the reduction of dollarisation in our banking sector, which is much lower than in neighbouring Georgia and Armenia, where this parameter exceeds 50 per cent. Taking into account these and several other factors, S&P has improved the sectoral risk assessment from "9" to "8" and placed the banking system of Azerbaijan in the "8" group at the level of sectoral and country risks of the banking sector (BICRA). Accordingly, the rating of Azerbaijani banks was upgraded from "b+" to "bb-".

In turn, the conclusions of Moody's Investors Service, which in December confirmed the long-term domestic and foreign currency deposit ratings of the leading credit institution of the republic - the International Bank of Azerbaijan (ABB) at the level of "Ba3", and the corresponding indicators of Xalq Bank OJSC at the level of "B1", are an indirect indication of the positive development of the domestic banking system.