How do you assess the current situation in Azerbaijan’s banking sector? What do you feel are the main issues?
The finance industry is a mirror of the economy. The fall in oil prices, economic slowdown, devaluation of the manat – all these factors have left their mark and have brought about changes in the market situation. Looking at it on a long-term horizon, the most serious problem today, besides the impairment of loan portfolios, is the dollarization of bank liabilities. Until recently, dollarization exceeded 80%, which put immense pressure on the banking system.
How can we stop dollarization?
One of the key ways to reduce dollarization is to enhance the attractiveness of the manat, which can be achieved, first of all, by raising the interest rates on manat deposits. This is exactly the method deployed by Turkey during the crisis in the early 2000s, when they hiked interest rates on lira deposits to 50% per quarter, or 200% a year. After a while, banks lowered the interest rates to 25% or even less, and, after some time, the Turkish market stabilised. This method is practiced all over the world.
The role of the banking regulator is certainly very important in this context: banks should be given a chance to invest in various instruments to help relieve the pressure on deposit expenses. A change in economic environment can also influence the amount of investments. Given the present state of the economy, we cannot expect Azerbaijan to draw a lot of new investments in the near future, although the state and international financial institutions may well enhance their investments. But I think that the main task we face today is to support the real economy, including the financial sector that can, in turn, lay the foundation for stabilising the economy and, therefore, make it more attractive for new investors.
Many people call the current situation a crisis but it would be more correct to call it a reality of capitalism. As a part of the world economy, Azerbaijan is vulnerable to the risks typical of other countries. Despite the current challenges, our banks have fantastic opportunities to boost their business, especially in the corporate sector. Our government is offering nationwide, large-scale initiatives to help support businesses and boost economic recovery, which also builds up potential for the banking sector. However, if banks ignore risk management, fiscal control and spending optimisation, they will be unable to withstand the competition and economic turbulence.
Does your bank continue to grant credit under these difficult market conditions? How do you manage problem loans and foreign currency loans?
Yes - our credit activities haven’t stopped even for one day. As for the clients in arrears, the bank works individually with each of them. We sometimes help to find a company to undertake the management of the business and assist in operations recovery. Such an approach is appropriate for cases when insolvency was caused by the wrong management team being in place.
The changes in Azerbaijan’s macroeconomic environment have not had a serious impact on our loan portfolio, as we do not grant credit facilities without first conducting an in-depth analysis of the client’s business needs. For instance, if a customer operates within this country and has a manat income stream, it would be improvident to lend him money in foreign currency. PASHA Bank grants foreign currency loans only to 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 and so on.
Back in late 2014, when it became clear that the macroeconomic environment would be changing, we analysed and restructured our clients’ loans, especially long-term, hard currency loans. Not everyone understood why this was necessary at the time as all the market players were performing well. But thanks to the measures we took, we have actually seen an increase in customers at PASHA Bank. During these difficult economic times, the quality of service and professional expertise are the key factors clients pay most attention to when choosing a partner bank.
Today, PASHA Bank’s loan portfolio amounts to 700 million manats. The majority of loans were granted to 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 the real sector so well and the needs of private companies.
How will the Financial Market Services Agency facilitate the stabilisation of the country’s banking sector? What are the additional incentives that the banking sector needs?
Azerbaijan has to tighten control over the fiscal and banking sphere and here I do not mean 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, like our customers, take a favourable view of the latest legislative amendments and welcome constructive dialogue between business and the state. I am convinced that the Financial Market Services Agency will promote further development of the financial sector.
It is an open secret that confidence in the banking sector has been undermined. In spite of that, PASHA Bank is expanding its client base. How do you manage to maintain the trust of your customers?
Given our current macroeconomic challenges, the general public and businesses are now attaching more importance to the financial stability of a bank. PASHA Bank is the only bank in Azerbaijan that has improved its credit rating over the past year.
We have been able to stop the dollarization process, we changed our deposit terms and, as a result, we acquired around 70 million manats in new deposits. 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, rates have risen to 15-18% for private individuals and to 12-15% for legal entities, with an interest rate of 18% for three-month deposits. All countries transitioning to open market operations have taken this approach at some stage.
You are arguing in favour of raising interest rates, while some foreign countries are already using negative interest rates. How will this policy affect Azerbaijani banks?
The use of negative interest rates abroad and in the European banking system in particular causes our financial sector to incur additional expenses, as our banks have a lot of currency residues. At present, the euro deposit rates in foreign banks are between -0.3% and -0.5%; this is another expenditure item and will lead to a deterioration in liquidity. In Azerbaijan, it would be very risky to issue funds in euros to a company that is not involved in exports 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 favourable for issuing commercial short-dated (one to six months) securities. This is something that 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 would be too 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 export-oriented companies receiving revenues in foreign currency. When some of our clients were planning to issue securities denominated in foreign currencies, we informed them of possible risks and convinced them instead to issue manat securities.
Manat papers can arouse interest due to 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% over a three-month period (while the yield from the government securities issued by the Ministry of Finance is 12%), there is a much greater likelihood of high levels of investor interest.
Do you feel that it’s necessary to make changes to 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, our main goal is to support our customers and help them to retain their market positions.
by Ilaha Mammadli
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