Azerbaijan 2012 | FINANCE | REVIEW: BANKING

Having proven its resiliency through the crisis, Azerbaijan's banking system continues to mature, with consistently improving indicators and an increasingly sophisticated regulatory regime.

This growth is coupled with gradual consolidation, in keeping with Central Bank of Azerbaijan (CBAR) policy to further strengthen the sector through a strategy of optimization. As of January 1, 2012 there were 44 banks in operation in the country, down three from the previous year. All met the country's minimum capital requirement of AZN10 million, prudently put into place in 2007, a year before the collapse of Lehman Brothers. Of the total there were 23 banks that have foreign capital, seven of which were majority foreign owned.

On the heels of solid performance in 2010, indicators further improved in 2011. By the beginning of 2012, the overall capital adequacy ratio (CAR) stood at 17.4%, up from 16.8%. Lending was up slightly with a 0.5% year-on-year increase, while the loan-to-GDP ratio was down modestly from 26.8% to 23.4%. Household deposits were up by almost 36%, ostensibly marking the end of the confidence crisis that still plagues many emerging markets in the region.

As of January 1, 2012, Azerbaijani banking assets reached a historic high of AZN14.26 billion, up 7.3% from the previous year. Consumer loans made up the largest portion of assets at 63.2%, or AZN9 billion, signaling a 5% year-on-year increase. The next largest segment came from correspondent bank accounts, which came to AZN1.34 billion, or 9.4% of assets. The largest increase among types of assets was in cash, which was up 42.4% to amount to AZN695.2 million or 4.9% of total assets. Investments also increased significantly, up 34.6% percent to AZN1.34 million. Loans and deposits, representing 4% of all assets, also grew 8.29% to total AZN567.7 million.

In terms of total liabilities, obligations represented the lion's share at AZN11.83 billion, or 83% of all liabilities. Loans and deposits received from the financial sector were 30.52% of liabilities, or AZN6.67 billion. NPLs remained manageably low at 6.4%.

The banks' net foreign asset position has also seen improvement as the deficit shrank to $899 million from $1.2 billion in 2010. With liquidity squeezed on the international capital markets, continued improvement of this position will help to allay concerns among deficit hawks.

The banking sector remains the second-fastest growing in the country. In the past five years, according to NBC Bank, assets in the sector have grown 3.6 times, the loan portfolio has increased 4.05 times, and local bank deposits have expanded 4.63 times.


Showing that confidence is a two-way street, the banks' overall increase in deposits was matched by a robust year-on-year increase in lending of 8.59% as of January 1, 2012. Total allocations, according to CBAR, equaled AZN9.95 billion. Long-term lending accounted for 69% of all credit and was up 4.6%. Short-term lending made up the remaining share, but spiked 18.86% compared to the year before.

According to CBAR, the bulk of lending went to households, which received 33.3% of loans, or AZN3.32 billion. The next largest category was trade and services, which received 28.6% of loans or AZN2.84 billion, followed by real estate and construction, which received 8.8% or AZN875.3 million. About 5.9% of loans, or AZN582.9 million, fell to industry and production. This was followed by agriculture and processing (4.7% or AZN466.7 million); transport and communications (4.1% or AZN409.7 million); and energy, chemicals, and natural resources (2.9% or AZN289.7 million).


The authorities have recently renewed pledges to boost liquidity in the economy, continue the stabilization of the banking sector, and bolster the financial sector through an improved regulatory environment.

CBAR's optimization strategy, in particular, intends to consolidate the number of banks in Azerbaijan from 47 to 20 over the long term. Fewer but financially stronger banks would create healthier competition in the sector, according to CBAR, and would allow the regulator to supervise it more effectively. In line with this strategy, CBAR is increasing capital requirements and encouraging small banks to merge or become non-bank credit organizations. Further macro-prudential regulations have also been put in place in 2011 and 2012, such as imposed leverage ratios and increased reserve requirements.

On the other side of the coin, CBAR is continuing its 2008 measure that exempted banks from paying taxes on profits for three years if they use the funds to raise statutory capital.

According to some analysts, particularly the IMF, the Achilles' heel of the system is its domination by the International Bank of Azerbaijan (IBA), a public bank with over 50% of the sector's assets and relatively low capitalization. The recent appointment of consultants to draft a privatization strategy for IBA is sending positive signals to the market. A timetable for a transparent privatization plan is expected to be released in the near term.


One of the most conspicuous trends in Azerbaijan's banking sector—and an indicator of an increasingly sophisticated consumer—is the growing demand for non-cash products, specifically payment cards and payment-card transaction categories. Virtually non-existent a decade ago, payment cards and POS transactions comprise one of the fastest growing segments in the sector.

As of April 2011, Azerbaijani banks had issued 4.34 million plastic cards, up 6.9% from the previous year. Approximately 358,000 non-cash operations were performed by debit cards in 1Q2011, and 93,000 were done by credit cards.

The Bank of Baku became the latest to add the on-site processing of payment cards, allowing it to offer a full range of fraud-protected MasterCard and Visa products to its customers. There are now four processing centers in the country. Several more banks that currently offer cards but outsource processing are looking at plans for their own transaction centers.

One such bank is Expressbank, which in 2012 inked a deal to receive the MChip cards and ATM MChip certification from MasterCard. “Expressbank sees a major potential in [the card segment], but one that is always linked to the retail side of our operations," says CEO Emin Mammadov.

As of January 1, 2012, Kapital Bank's “KapitalKart" led the way in terms of number of active plastic cards with over 2 million issued. The bank also has 421 ATMs and 466 POS terminals. In 2011 Kapital Bank was recognized with a leadership award from MasterCard International for the most Maestro cards issued throughout the year.

The leader in “innovative cards" is arguably IBA, which offers a dual contact and non-contact interface, and dynamic data authentication (DDA). The state lender's card activity represents 33% of the entire card market in the country, 32% of all the ATMs operating in the country, and 32.4% of all POS sales. In 2011, there were 103,683 IBA cardholders with card transactions accounting for AZN2.5 billion. By comparison, the number of IBA cards in 2002 was 28,000, accounting for $71 million.

CBAR is working to bring the card market up to international standards through workshops with MasterCard Worldwide, commissions on card fraud, and other measures aimed at an improved risk management system for electronic commerce.


Growth in products and assets has naturally been coupled with physical expansion. In 2012 Unibank plans to open four new branches, two in Baku and two in the regions. Other banks, such as the Bank of Baku, are planning for the aggressive enlargement of branch numbers as well as ATMs and 24/7 kiosks.

As local banks grow in size and strength, and competition in the domestic market stiffens, Azerbaijan's largest institutions are eying regional expansion. In 2011 Pasha Bank opened a representative office in Georgia and launched plans for an office in Switzerland. “We want to grow our market share and our importance within the banking sector in Azerbaijan and the whole region," Farid Akhundov, Chairman of Pasha Bank, Azerbaijan's third largest by asset size, told TBY.

IBA has the most active presence in the global financial space. Its subsidiary bank in Moscow recently celebrated its 10th anniversary, and IBA itself has branches in St. Petersburg and Yekaterinburg. There is a Georgian branch, which is involved in a number of regional projects, as well as representative offices in London, Frankfurt, Luxembourg, New York, and Dubai. It has also recently developed a strategy to enter emerging markets, prioritizing the integration of the banking sector in the CIS. Jahangir Hajiyev, Chairman of IBA, told TBY that it has also put in place a program to monitor trade and political relations with Qatar, Switzerland, and the US with an eye toward further expansion.