Azernews.Az

The gradual process of consolidation in Azerbaijan`s banking sector is inevitable, associate director of the banking analytical group Fitch Ratings Dmitry Abramov has said.

``Business is usually built on the maintenance of shareholder interests at small banks, which together with the small size of operations raises the question of their economic viability,`` Abramov told Trend news agency.

Abramov noted that the relationship between the process of consolidation and asset quality is quite remote. However, consolidation of banks has several advantages. First, the increase in activity can streamline the efficiency of banks to improve the ratio of operating expenses and income from banking activities.

``This, in turn, creates the preconditions for a reduction of borrowing costs and increases access to credit for borrowers,`` Abramov said.

On the other hand, he said, banks receive the necessary margin to overcome the temporary difficulties that could arise with any deterioration in market conditions, while increasing their operating efficiency.

Secondly, larger banks tend to have more opportunities to create sustainable patterns of funding due to a significant amount of internal computational speed, attractiveness to retail investors and a greater likelihood of government support in case of systemic stress. In addition, there is an opportunity to diversify funding through access to international capital markets, Abramov said.

According to the Fitch Ratings official, the consolidated banking system certainly creates the preconditions for more effective oversight.

``In our view, a more urgent task may be the creation of system tools to support liquidity and, as we understand it, the central bank aims to address this issue,`` Abramov said.

According to him, it is important to improve the standards of risk management in banks, in particular, reduce reliance of credit transactions in a volatile real estate market, as well as increase the transparency of the banking sector.

In general, Abramov does not see the solution of problems of the domestic banking sector in terms of improving the quality of bank assets in the consolidation of banks through the consolidation of healthy assets.

He said Azerbaijan is roughly comparable to other CIS countries by the number of banks at the moment (44), particularly to Belarus, Kazakhstan and Uzbekistan.

Central Bank of Azerbaijan (CBA) board chairman Elman Rustamov said the bank will start negotiations on consolidation in the banking sector after the summer.

``The government is interested in this, as a union of a group of relatively weak banks will result in the consolidation of capital, and the increase in resources will provide a transition to a qualitatively different level of customer base, technology used, and corporate governance,`` Rustamov said.

A strategy of consolidation and optimization of the banking sector developed by the CBA involves a reduction of the number of banks in Azerbaijan from 44 to 20 in the long run.

The domestic banking system already has a successful practice of consolidation of banks with the participation of EBRD. The present UniBank was formed through the merger of two commercial banks - MBank and Promtexbank in 2002, where the EBRD bought a 15 percent stake. Afterwards, a merger of the Bank of Baku and IlkBank took place in 2005.