Azernews.Az

By Gulgiz Dadashova

The policy on consolidation of the banking sector pursued by the Central Bank of Azerbaijan (CBA) is aimed at strengthening the sector and will increase its stability.

Senior analyst of Standard & Poor's Loan Ratings Service Victor Nikolskiy believes that the policies on shrinking the number of banks and procedures which are being carried out by the CBA have one aim -- increased stability -- and that is inherent to many countries.

Currently, Azerbaijani banks are required to have a total capital of no less than 10 million manats (over $12.7 million). However, the new requirements of the CBA will take effect from January 1, 2014, and from then onward the total capital should be at least 50 million manats.

In general, the CBA has identified the following development options for the banks: capitalization, consolidation or conversion into NBCOs or going out of business.

However, Nikolskiy said, currently the regulators use more complicated applications in the main for controlling the capital of banks; imposing the Basel III standard and clipping the minimum capital is used less often.

"Such a size of the minimum capital is higher than in the majority of countries of the region. From our point of view, this will increase stability in the system," he told Trend news agency.

Nikolskiy went on to say that it is very difficult to say at this point whether there will be a lot of mergers or absorptions.

"Each bank has an owner which the bank serves. When two such banks attempt to merge it is practically impossible, as the owners of all the banks are different and they don't want to open their financial flows to each other for several reasons. This leads to the issue that all (banks), even small banks, try to increase their capital to the necessary level to remain in this system," he said.

Nikolskiy noted that foreign banks are still interested in the process taking place in Azerbaijan's bank market.

"We know there is interest from Georgian, American, Turkish and Russian investors. The arrival of foreign investors is possible. Investors are waiting and can do something on the eve of January 1, 2014 when the banks will have no choice. They will agree to absolutely different conditions than the ones they offer now," Nikolskiy said.

The banking system of the country already has a successful practice of banks' consolidation with the assistance of the European Bank for Reconstruction and Development (EBRD).

CBA announced the start of the process of consolidation of the local banks in late 2012.

For instance, the present UniBank was formed through a merger in 2002 of two commercial banks, MBank and Promtexbank, and the EBRD acquired a 15 percent stake. This was followed by a merger of the Bank of Baku with IlkBank in 2005.

International financial institutions may become involved in the current consolidation process. In particular, the EBRD, the International Finance Corporation, and Asian Development Bank, which are interested in acquiring capital of possible new groups, earlier expressed their interest in joining this process.

The number of banks operating in Azerbaijan with capital exceeding 10 million manats reached 41 in Q1 2013.

Meanwhile, the share of banks with capital worth 3.5 million manats to 5 million manats in the total capital of all banks made up 0.3 percent in this period.

The number of unprofitable banks went down by four and the total loss was halved.

43 banks operate in Azerbaijan.