Azeri banks play long game

By bne IntelliNews November 11, 2009

Ben Aris in Baku -

"When it rains, everyone gets wet," says Samir Huseynov, chairman of leading Azeri commercial bank Texnikabank. "But we had umbrellas and so we are not as wet as our neighbours."

Azerbaijan's banking sector has fared remarkably well during the current crisis thanks to large foreign currency reserves, a prudent regulator and the unexpectedly strong performance of oil.

While the rest of the region lies mired in the trough of the crisis, lending is resuming again slowly and the country will be one of the very few in the region to report positive GDP growth this year. The economy grew 6.6% on year in the third quarter; the government is hoping that by the end of 2009, the economy will record 10% of growth, outpacing even China. Gross international reserves are equivalent to half of GDP or enough to cover 24 months of imports, where three to four months import coverage is thought to be adequate in most countries of the world. The economy may be small, but the government has a lot of money.

Unstressed banks

There are some advantages to being less far down the development road. Bankers in Azerbaijan have never borrowed much from overseas; indeed, unlike their Russian counterparts who were keen to leverage up as much as they could in an effort to fuel high growth rates, most Azeri bankers who bne talked to for this article seemed very wary of borrowing abroad, and of the regulator even more so. "In hindsight, the central bank's conservative approach was right, although at the time we complained, but now we have enjoyed the advantages of the policy," says Huseynov.

While foreign borrowing wasn't banned, the central bank imposed a 5% reserves requirement on any money raised abroad, which acted as a deterrent. "Our strategy is not to orientate ourselves to western money but towards local depositors, as we can comfortably balance our liabilities and assets this way," says Elmir Hasanov, chairman of the board at Muganbank.

According to the Central Bank of Azerbaijan (CBA), non-performing loans (NPLs) were 2-3% of total loans at the start of September. Moody's Investors Service uses a broader definition of NPLs and puts the number at about 7%; the CBA only counts in loans that are more than 90 days overdue, whereas Moody's counts loans that are 30 days overdue. "Even at the higher level, this is still not a big problem. The average size of the loan portfolio is $180m, so this means the banks have to find some $15m of provisions, which is not a lot of money," says Elchin Gadimov, vice chairman of Rabitabank.

Moreover, the CBA has made it clear that it won't allow any banks to default on their debts and, thanks to the petrodollars, it as more than enough in the coffers to match its words with deeds if push comes to shove. "We are happy the crisis came when it did, as banks could withstand the impact. The river doesn't always bring big red apples and if the crisis had come later, we would have been in a much worse position," reckons Huseynov.

Part of the reason why bad debt levels haven't become much of a burden is that consumer defaults are a function of unemployment, and as the state still dominates the economy and hasn't laid off anyone, workers find themselves in more or less the same position they were before the crisis began, allowing bankers to heave a sigh of relief. "Going to court to recover a small consumer loan is the last thing you want to do in Azerbaijan, as it will take at least a year to get your money back," says Gadimov.

Remittances are also down less than elsewhere; Azerbaijanis working aboard send home roughly $2bn a year and while the volumes have fallen in the last year, the fact most expats work in the food retail business, which has been a lot less affected than construction where many of their peers from the region work, means they are still earning more or less the same amount.

Finally, trade volumes are down, but lots of domestic sectors like agriculture are working more of less as they were before.

Real estate headache

The one place where banks did get into trouble was with real estate. A boom in prices led many to speculate and these investors were badly burned when the property market collapsed at the start of this year; up to half of bank loans were secured with real estate assets, calculates the CBA.

The government was quick to step into the breach and has restarted its mortgage programme, pumping money into the market to support the banks. "The government issued about AZM30m (€25m) of mortgage-backed securities in the summer via the local exchange and the entire issue was taken up by banks. The reason they were so popular is the central bank has slashed rates from 12% to 1.1% and the MBAs were paying 4%, plus they are backed by the state," says Gadimov.

After a wobbly few weeks in March, confidence in the banks has returned and deposits recovered to an all-time high - helped by the fact that the CBA increased the maximum amount covered by the deposit insurance five-fold. Moreover, reluctant to lend to the real economy, banks have been lending heavily to each other and volumes on the interbank market are up five-fold above their regular levels.

But have Azeri bankers learnt their lesson? In light of the problems that Unibank ran into in March - which remains the only bank that has had to be bailed out by the state - bankers and regulator both indicate they adopt a more cautious approach. "We can see the CBA is pushing harder on transparency and there is a greater emphasis on risk management. The market was already very competitive, but we have to concentrate now on building a strong bank, as it will get more competitive; in the coming years, we will see a reduction in the number of banks from 46 to say 35 or possibly down to 5-10, which would be sufficient," says Muganbank's Hasanov.

The crisis burst the real estate bubble, resulting in a shakeout of the businesses that relied too heavily on personal connections or speculative income from real estate. "The slowdown in the real economy has helped us to filter real business with sound business models from those that were simply speculating on the increasing real estate prices," says Huseynov.

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