The coming consolidation in Azerbaijan's banking sector

By bne IntelliNews September 28, 2012

Clare Nuttall in Astana -

Higher capital requirements for Azeri banks are set to force consolidation and reduce risks in a sector currently expanding rapidly along with the growth of the country's non-oil sector. Larger banks will, Baku hopes, mean more loans to support development of the economy, but for the 72% of banks that fall below the new threshold the next 15 months will be a scramble to find new partners or risk losing their licenses.

Banks have already started to look for new partners after the Central Bank of the Republic of Azerbaijan announced on August 3 that it was raising the minimum aggregate capital requirements. The new requirements will be quintupled from AZN10m ($12.7m) to AZN50m ($63.7m), with banks having until January 1, 2014 to increase their capital or find another solution such as merging with another bank.

Azerbaijan has 44 commercial banks - a large number given the country's population of just over 9m. As of April 1, only 12 of those banks met the new requirements, according to data from APA-Economics. "The central bank raised capital requirements for banks to strengthen the banking sector and increase its sustainability. The bank's aim is to take the sector to a new stage of development, [with] larger banks that can benefit from economies of scale," says Elchin Gadimov, vice chairman of the board at Rabitabank.

This consolidation process has already occurred in other countries. Kazakhstan, for example, raised equity capital requirements to KZT5bn ($33.2m) in 2009, a move that led to several acquisitions of smaller banks by international investors. Azeri bankers say that while the country has a relatively low level of foreign ownership right now, this is not for lack of potential acquisition targets, and M&A is expected among local players. "We have seen the same process across Europe. It will make banks improve, encourage banks to be more competitive. Unibank already meets the capital requirements, but we expect M&A among some other banks," says Yevgeniy Soltanov, marketing manager of Unibank.

Within Azerbaijan, banks have already started to react. NBC Bank was quick off the mark, raising its capital from AZN20m to AZN50m just five days after the central bank's announcement. And Gadimov says Rabita is considering how to comply. "We are looking at our options, which include an alliance with an institutional partner, consolidation or raising capital on the local market. We would consider a merger with or acquire another bank if both parties had the same market focus and vision for the future - the right mix is essential."

AccessBank Azerbaijan's CEO Michael Hoffmann notes that there are still questions about how the ruling will be enforced. "The new legislation should have a significant impact on the banking sector, as some banks are well below the threshold... It is not yet clear what will happen to banks who fail to meet the deadline, or whether there will be extensions," he tells bne.


Strengthening the banking sector is part of the government's strategy of growing Azerbaijan's non-oil sector. After more than a decade of lopsided development, with Azerbaijan's booming economy almost solely reliant on its oil and gas sector, in recent years the government has made a concerted effort to diversify the economy. Realising that the energy boom cannot last forever, Baku has started using its hydrocarbons revenues to grow the non-oil sector, and launched anti-corruption efforts in a bid to stop small businesses being stifled.

In 2011, Azerbaijan's GDP growth dropped to just 0.1%, but the non-oil sector expanded by 9.4% during the year, government data shows. This is positive for Azerbaijan's banks, which are very active in the non-oil sector. "Azerbaijan's banks are a very important contributor to growth of the non-oil sector, but at present the banking sector is very fragmented and the banks are limited by their size and consequent ability to efficiently meet financing needs available on the market," says Gadimov. "The decision to increase capital requirements will create larger and stronger banks, making it possible for banks more confidently to pursue investment opportunities and also invest into larger projects."

Overall, banks have been growing rapidly, helped by the government to overcome the first wave of the 2008 crisis, with the central bank giving additional liquidity to banks that needed it. The crisis also forced a switch in focus from the corporate to the retail and small and medium-sized enterprise (SME) market segments. "After the crisis, some banks changed their strategies to put more focus on retail banking. Currently, Unibank is more focused towards the retail segment. We plan to expand further in the retail market," says Soltanov.

As economic activity in Azerbaijan becomes more diversified, banks are increasingly expanding into previously neglected areas of the economy - both geographically and in terms of sector focus. "We have seen a lot of growth in the regions, in agriculture and other parts of the non-oil sector. This is not only major towns outside Baku, but also regional towns with populations of 100,000-200,000, many of which are exhibiting growth in the high double digits," says Hoffmann.

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