The Central Bank of the Republic of Azerbaijan announced the “Financial stability” report. The report examines possible risks and current trends in the financial sector.
It should not be forgotten that the banking system plays the role of the main financial intermediary in the financing of the economy in Azerbaijan. In other words, there is a bank-based financing model here. It is clear from the announced indicators that according to the results of last year, the ratio of banking sector assets to Gross Domestic Product (GDP) in the country (financial depth of the sector) is 35.2 percent. This indicator is one of the main indicators measuring the place of banks in the country’s economy. In neighboring Georgia, this indicator is twice as high as in Azerbaijan. The report of the Central Bank also states that according to that indicator, the result of Azerbaijan is lower than the benchmark countries (“Benchmarking” is used in the sense of an enterprise taking an example by looking at leading or leading companies in order to increase its competitiveness – ed.). From all this, it is known that banks in Azerbaijan can take a more active role in the country’s economy. Because of this, there is a need to develop the non-energy sector in particular. In this regard, the limited development of the non-oil sector in the country keeps banks from potential development.
Another point highlighted by the Central Bank in its report is the increase in concentration in the country’s financial sector. According to official figures, Compared to 2019, the market share of the three largest banks in terms of assets increased by 9 percentage points and reached 65 percent. One of those three banks belongs to the state (International Bank), two belong to the president’s family members (Pasha Bank and Kapital Bank). The market share in the deposit portfolio of those banks is 70 percent, and 48 percent in loans. About three quarters of the banks’ annual profit goes to these three banks.
81.5 percent of liabilities are deposits
Banks themselves need money to provide credit resources to both companies and individuals. From the figures released by the Central Bank, it appears that Azerbaijani banks meet this need mainly through deposits. During the past year, the deposit portfolio of the banking sector increased by 25 percent (6.8 billion manats) and reached 33.8 billion manats. The size of the deposit portfolio is 81.5 percent of banking sector liabilities. 66 percent of the deposit portfolio consists of deposits of legal entities and 34 percent of individual deposits. Another highlight: The deposit portfolio of the sector in question was formed mainly (74 percent) due to demand deposits. Customers can withdraw such deposits at any time. The high share of demand deposits in the financing of the banking system requires the sector to maintain a large liquidity buffer. This has a reducing effect on the volume of funds that banks can allocate for lending. For the same reason, banks are interested in providing shorter-term loans, and thus entrepreneurs interested in long-term and large-scale loans are in trouble.
On the other hand, the large share of deposits in bank liabilities also increases the loan interest rates in the country, because the attraction of such funds increases the costs of banks relatively more. This increases the cost of the loan.
Another noteworthy point in the activity of the financial sector of the Central Bank last year is non-residents. According to the disclosed information, compared to 2021, the liabilities of the banking sector to non-residents increased by 2.5 times (1 billion 500 million manats) and reached 2.5 billion manats. So, the share of liabilities to non-residents in total liabilities increased from 3.1 percent to 6.1 percent. On the other hand, if in 2021 the deposits of non-residents are equal to 1.4 percent of the total deposits, this indicator has already increased to 5 percent.
What about other risks?
In the “Financial stability” report of the Central Bank, risks related to various directions in the banking sector were also included. For example, the report states that the main macroeconomic risk factor related to the sector is uncertainty caused by complex geopolitical and geoeconomic processes. Moreover, high inflation is again one of the main macroeconomic risk factors.
As for credit risks, according to the Central Bank, the quality of the loan portfolio has increased due to the positive dynamics in the quality of assets and the reduction of bad debts. However, there are still sensitive areas. In this regard, the Central Bank considers it important to pay particular attention to the quality of the loan portfolio, reserve allocations and restructuring steps.
The main risk factor mentioned in the profitability report is the uneven distribution of profits among the banking sector, with three banks owning most of the profits. According to the volume of profit, the top three banks have 78 percent of the total profit. Now 25 banks operate in Azerbaijan. The Central Bank considers it important to control the growth rate of non-interest expenses related to profitability.
As for market risks, the Central Bank believes that such risks have been relatively reduced due to the reduction of the open currency position of banks (the difference between receivables and debts in foreign currency) and the dollarization of deposits. But we must not forget that the indicator of dollarization of deposits in the country is still much higher than in neighboring countries. This can be considered as the lack of complete recovery of trust in the national currency, especially of large companies.
Regarding liquidity, the Central Bank states that the liquidity of the sector is in the comfort zone and fully meets the requirements. However, initiatives to distribute liquidity more evenly across the sector are also ongoing.
Freedom radio