The Central Bank of Azerbaijan is introducing an additional countercyclical capital buffer.
As Day.Az reported on Monday with reference to the CBA, the application of this norm will begin on March 1, 2025.
The Board of Directors of the Central Bank of Azerbaijan (CBA) has decided to introduce an additional countercyclical capital buffer in the amount of 0.5% for the total and first level of capital of the country’s banks. This decision will come into force on March 1, 2025.
The decision to introduce a countercyclical buffer was made in accordance with the Rules for calculating bank capital and its adequacy. The basis for this step was the credit gap indicator (the difference between the ratio of the loan portfolio to GDP and its long-term trend), which exceeded the threshold of 2%. Also, the dynamics of lending growth, high profitability of banks and strong financial performance of the sector became additional factors for activating the buffer.
As of the end of November 2024, the growth of the loan portfolio amounted to 19.6%, which is almost twice the growth of nominal GDP in the oil and gas sectors of the country. 19 out of 22 operating banks recorded growth in their loan portfolio, and in 14 of them the growth exceeded the growth of nominal GDP.
The countercyclical buffer is activated if the credit gap exceeds 2%. According to the latest calculations, this figure is 2.9%, which confirms the need to introduce a buffer.
The financial results of the banking sector also contributed to the decision: at the end of 11 months of 2024, banks received 966 million manats of net profit, and return on equity (ROE) amounted to 18.4%. The total capital of the sector exceeded 6 billion manat, while the adequacy of the total capital reached 17.5%. At the same time, banks paid dividends in the amount of 456 million manat in 2023 and 610 million manat in 2024.
The introduction of a countercyclical buffer, according to the recommendations of the Basel Committee, is aimed at increasing the stability of the banking sector and supporting financial stability. This decision is expected to strengthen the sector’s ability to withstand possible economic shocks and ensure stability in lending activities.
After the introduction of the buffer, the volume of potential risk-weighted assets in the banking sector will be about 18.7 billion manat, which retains significant potential for further expansion of the loan portfolio.
Postponing the introduction of the buffer for two months will allow banks to take into account the new requirements in strategic planning, budgeting and dividend policy.