How do you assess the current situation in Azerbaijan’s banking market? Which problems do you consider the most urgent?
The financial industry is a mirror of the economy. The fall of oil prices, economic slowdown, devaluation of the manat – all this affected the market and brought about changes in the market situation. I think that, in the long-term context, the most serious problem today (besides impairment of loan portfolios) is dollarization of bank liabilities. Until recently, it exceeded 80%.
How can we stop dollarization?
One of the key ways to reduce dollarization is to enhance the attractiveness of manat, which can be achieved, first of all, by raising the interest rates of manat deposits. If we refer to Turkey’s experience we will see that during the crisis in the early 2000s the interest rate of lira deposits reached 50% per quarter, or 200% a year. A little later banks lowered the interest rate to 25% or even less and, after some time, the Turkish market stabilized. This method is practiced all over the world.
Certainly, the role of the banking regulator is very important in this context: banks should be given a chance to invest in various instruments thus relieving the pressure on the deposit expenses. The change in economic situation can also influence the amount of investments. With the present state of economy, we cannot expect a lot of new investments drawn to this country in the near future. Under the circumstances, the state itself can become an investor, as well as international financial institutions. But I think that the main task today is to support the real economy, including the financial sector that can, in its turn, lay the foundation for stabilizing the economy thus making it more attractive for new investors.
Many people call the current situation a crisis but it would be more correct to call it a capitalist reality. Azerbaijan, being a part of the world economy, is vulnerable to the risks typical of other countries. Today our banks have fantastic opportunities to boost their business, especially in the corporate sector. Our government is offering nationwide large-scale initiatives aimed at economic recovery and business support, which also builds up potential for the banking sector. However, if banks ignore risk management, fiscal control, spending optimization, they will be unable to withstand the competition and economic turbulence.
Does your bank continue to grant credits under such difficult circumstances? How do you manage problem loans and foreign currency loans?
Yes, it does and our credit activities have not stopped even for a day. As for the clients who are in arrears, the bank works individually with each of them. Sometimes, we help to find a company that would undertake the business management and assist in operations recovery. Such approach is appropriate for cases when insolvency of the debtor was caused by the wrong management.
Basically, the changes in the macroeconomic environment in Azerbaijan have not affected seriously our loan portfolio, as each credit facility is preceded with a deep analysis of the client’s business needs. One must admit that if a customer operates within this country and has a manat income stream then it would be improvident to lend him money for his business development in foreign currency. PASHA Bank grants foreign-currency loans only to the clients who are involved in export activity: 90% of our foreign-currency loans are intended for purchasing services from foreign companies, financing export operations, importing equipment from abroad, etc.
Back in late 2014, when it became clear that the macroeconomic environment in the country would be changing, we initiated analysis and restructuring of our clients’ loans, especially of long-term hard-currency loans. At that time far from everyone understood why it was necessary because all the players in the market were doing well. But now, against the backdrop of general recession, we can see increase in customers at PASHA Bank. The time has come when the quality of service and the professional expertise are the key factors in choosing a partner bank.
Today, the loan portfolio of PASHA bank amounts to 700 M manats. The majority of the loans were granted to the companies operating in the non-oil sector. We are probably the only bank in the country that is oriented towards the non-oil part of our economy. That is why we know so well the real sector and the needs of private companies.
How will the Financial Market Services Agency facilitate stabilization of in the banking market of the country? Which additional incentives does the banking industry need?
Azerbaijan has to tighten control over the fiscal and banking sphere. I do not mean here the regulatory approach to interest rates. To ensure stability, we need a stepped-up supervision over risk management and evaluation of banking risks.
Some positive changes have already taken place. We and our customers take a favorable view of the latest alterations in the legislature and welcome the constructive dialog between business and the state. I am convinced that Financial Market Services Agency will promote further development of the financial sector.
It is an open secret that the confidence in the banking sector has been undermined. In spite of the that, PASHA Bank is expanding its clientele base. How do you manage to keep up the trust of your customers?
Now, after the changes in the macroeconomic background in this country, public and business attach more importance to the financial stability of a bank, to the availability of audit reports, etc. PASHA Bank is the only bank in Azerbaijan that improved its credit rating last year.
We managed to stop the dollarization process; we changed the deposit terms and as result we acquired about 70 M manats. Those clients whose dollar deposit terms expired converted their savings into manats.
This became possible as a result of raising interest rates for manat deposits since February: up to 15-18% for private individuals and up to 12-15% for legal persons, with the 18% rate of interest for three-month deposits. I’d like to mention that this way was made by all the countries in transition to the open market operations.
You are arguing in favor of raising interest rates, while in some foreign countries negative rates of interest are already used. How will this policy affect the Azerbaijani banks?
The use of negative interest rates abroad and in the European banking system in particular brings about additional expenses in our financial sector.
Negative interest rates affect the Azerbaijani financial market because our banks have a lot of currency residues. At present, the euro deposit rates in foreign banks are minus 0.3% to minus 0.5%, and this is another expenditure item. On the other hand, a bans cannot aggrieve its customers as this will deteriorate its liquidity. And to distribute the funds in euros within the country would be very risky if the company is not involved in export and does not have hard currency receipts.
Does PASHA Bank plan to expand its operations in the stock market?
We are working actively with our corporate clients and we think that the current market conditions are favorable for emitting commercial short-dated (one to six months) securities. Emission of short-term securities is widely practiced and is a highly popular fiscal instrument in developed countries. In the USA, for example, the value of the short-term money market is now several trillion dollars. But the placement of long-term papers would be inexpedient as their price will be high and the emission of national-currency securities with a fixed high rate does not comply with the present-day market reality.
As for the hard-currency instruments, an exception should be made for the export-oriented companies receiving revenues in foreign currency. When some of our clients were planning to emit securities denominated in foreign exchange we informed them of possible risks and convinced to choose the emission of manat securities.
Manat papers can arouse interest in case of their high yields. If a major corporate client announces the emission of three-month securities at 5% per annum you should not expect an influx of investors. However, if you announce 15% in a three-month period (while the yield from the government securities issued by the Ministry of Finance is 12%) one could forecast investors’ interest.
Do you feel necessary to make changes in the short-term and medium-term strategy of your bank?
I do not think any changes are required. PASHA Bank remains a corporate investment bank and in the short-term perspective our main goal is be to support our customers and help them to retain their positions in the market.
by Ilaha Mammadli
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