Central Bank reduces capital adequacy ratio of banks
By Aynur Karimova
The Central Bank of Azerbaijan has reduced the volume of the capital adequacy ratio from 12 to 10 percent and the capital adequacy ratio of the Tier I banks - from 6 to 5 percent.
These changes which were applied since December 29, 2015, were made to the "Bank capital settlement rules and its adequacy".
The CBA also reduced the level of "leverage" (a tool connecting the growth of assets to the growth of the capital) from 6 to 5 percent.
The CBA has restored the "leverage" norm since February 2011, which was canceled in 2003. Along with the balance sheet assets, off-balance sheet assets were included in the settlement procedure. The requirement was set at 8 percent (compared to 6 percent before the cancellation) as the "leverage" norm was intended to limit the banks' strong growth. While introducing the "leverage" norm, the CBA’s main objective is to ensure the management of capital, liquidity and credit risks at a safe level.
"This tool allows controlling the steady growth at a good capital base, growing on a sound base, controlling the level of capital, achieving a good correlation of assets and capital growth,” CBA Director General Rashad Orujov told Trend earlier. “This is very important. This is a very effective tool. It is beneficial as the asset growth is supported by good capitalization. "
Earlier, Fitch Ratings said that a sharp decline in the Azerbaijani manat hit capital ratios of local banks via inflation of foreign currency-denominated risk-weighted assets (RWAs), and in some cases, significant translation losses on unhedged short open currency positions.
The value of the manat has dropped on December 21, following the CBA decision to allow a freely floating exchange rate. As a result, US dollar and euro rose by nearly 50 percent in value in Azerbaijan. Earlier this year, the manat already lost 34 percent of its price.
The constantly increasing in price dollar and euro has created some difficulties for the national banks. Some banks face the risk of breaching capital ratios, although Fitch believes that some regulatory forbearance is likely to be provided, giving the shareholders time to inject capital and to bring the banks in compliance with regulatory capital adequacy rules.
Foreign banks
The CBA also announced new requirements to the local branches of foreign banks.
Under the requirements, the amount of bonus paid to the employees and managers of Azerbaijani branches of foreign banks during the year should not exceed the total amount of their annual salaries and additions more than twice.
These requirements were envisaged in an addition to the "Standards of corporate management in banks" added by the decision of the CBA on December 21.
Furthermore, the decision on awarding executives of branches (branch managers and their deputies, as well as employees in charge of management of one or more structural units) can be taken no more than once a year, and bonus to each member of the Supervisory Board cannot be more than one percent of net income of the bank for a year.
The bank should complete the financial year with a net profit and meet the requirements of the Central Bank on total capital, its adequacy, as well as the assets at the end of the financial year and at the time of the making a decision to pay bonuses.
Also, the payment of 60 percent of the bonuses should be postponed, and then should be paid within three years in equal installments.
Meanwhile, if the bank completes one of the following years with a loss, or the bank's net income is less than 25 percent of the net profit of the year of signing of a decree on the payment of bonuses, or violates the above mentioned requirements of the CBA, the deferred part of the bonus this year will not be paid.
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Aynur Karimova is AzerNews’ staff journalist, follow her on Twitter: @Aynur_Karimova
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