PremiumReview of monetary sector in Azerbaijan (Jan.-July 2012)

According to the decision of the Azerbaijan Central Bank, a license for banking activity issued for the Azerbaijani RoyalBank was revoked in July 2012. RoyalBank is a commercial bank operating in Azerbaijan. It has 32 branches in Baku and regions. RoyalBank was established on Aug. 2, 1993 as a joint commercial bank "OZ Bank".

According to the decision of Baku Administrative Economic Court N1, "Birlikbank" Open Joint Stock Company was declared bankrupt in July and the process of bankruptcy started. Birlikbank's license No 154, issued on June 30, 1993 was revoked in accordance with the decision of the Azerbaijani Central Bank in January 2011.

The bank's license was annulled because the bank operated without complying with prudential regulations and reliability norms. This factor deteriorated the financial situation of Birlikbank. Despite the CBA has officially notified the bank about the violation of the legislation and various regulations, it has not complied with instructions to improve the financial position and institutional development. As a result, Birlikbank lost its solvency. Birlikbank's license was revoked due to the lack of the bank's opportunities to fulfill overdue obligations to the banking sector and state agencies, an unacceptable level of the quality of its assets and the level of their control.

According to the Board of the Azerbaijani Central Bank, the minimum amount of total capital of existing banks and the authorized capital of newly established banks increased to 50 million manat. The decision of the Central Bank was made on July 25, 2012.

The new regulation for the minimum amount of total capital will take effect from January 1, 2014. Today, the minimum requirement for capitalization of both existing and newly established banks is 10 million manat.

The transition period provides the banks with sufficient time to implement strategies to correspond with the new capital requirements and for the gradual implementation of capitalization. The research shows great potential in the banking sector to meet the new requirement.

Using a new requirement, along with strengthening the position of the Azerbaijani banks in terms of capital, promotes equity and efficiency of financial mediation. As a result, the stability of the banking system and financial stability will be more enhanced.

Currently, the Azerbaijani banking system is entering a new phase of development. At present, it is necessary to continue capitalization to strengthen financial mediation, integration into global financial markets and ensure a new quality of banking services. Strengthening the capital base of banks is of great importance from the point of view of increasing confidence in the banks and their international competitiveness. At the same time, it will have a positive impact on the development of financial markets, including the inter-bank market.

All this will lead to an increase in financial depth of the banking system in accordance with the purposes to double the growth and diversify the economy.

Currency market and manat rate

The imbalance in the economy of the U.S. economy and the euro zone weaken the positions of two world currencies. Unfavorable forecasts of the influential Western experts on the fate of the dollar and the euro provoke more confidence in their own currency. Today one can speak with confidence about the high reliability of the national currency, the manat rate will definitely rise compared to the dollar and the euro

In July 2012, the official exchange rate of manat compared to the U.S. dollar strengthened by one point. The dollar exchange rate in the country decreased from 0.7856 manat per U.S. dollar to 0.7855 manat per dollar from early July to late July.

In July, the euro rate in Azerbaijan fell by 238 points (from 0.9888 manat per euro to 0.9650 manat per euro).

The forecast of the average annual rate of national currency compared to the U.S. dollar remains unchanged - at 0.79 manat until 2015 as in 2011. As one can see, the government preserves stability with respect to the forecast of the dollar rate and predicts a gradual appreciation of the manat compared to the euro

According to the forecasts of the Azerbaijani government, the rate of the manat compared to the euro in 2012 is expected to hit 1.0910 manat per one euro compared to 1.0939 manat expected in 2011 (according to the CBA, the exchange rate was 1.0178 manat as of the end of the year). The rate for 2013 is projected at 1.0608 manat, in 2014 - 1.0430 manat and 2015 - 1.0387 manat.

The total volume of trades in currency section of Baku Interbank Currency Exchange (BBVB) in July hit 68.583 million manat or 87.336 million in dollar equivalent.

The total trading volume in currency section decreased by 11.084 million manat or by 14 percent during this period compared to June.

In total, 10 banks have taken part in the trades of currency section of the BBVB. In accounting month in "Bourse E-System of Trades" (BEST) 44 trading sessions are conducted and 37 transactions are registered.

The average daily turnover in "Bourse E-System of Trades" on USD/AZN reached approximately $ 3.970 million, then that the average volume of each transaction has made $ 2.360 million.

The exchange rate of national currency on USD / AZN_TOD in the reporting month, increased by 0.03 percent - from 0.7850 to 0.7848 manat to $1. The average rate of the U.S. dollar compared to manat was 0.7853 manat to $1 in July 2012 compared to 0.7854 manat as of June.

Monetary market of Azerbaijan

The CBA's important task is to govern the money supply at an adequate level of macroeconomic and financial stability in terms of a continuous growth of foreign exchange reserves and high liquidity of the banking system.

The Azerbaijani Central Bank stressed an increase in all units of the money supply as of seven months of 2012 compared to a similar period of last year and all parameters compared to early 2012. This is a result of the influence of two factors: the increase in the quantity of money in circulation and the rate of their turnover.

The Central Bank of Azerbaijan (CBA) noted the increase in money supply (M2) (cash in circulation (outside banks) and remainders in the domestic currency on accounts of non-financial organizations, financial (excluding credit) organizations and physical entities) by 8.8 percent during seven months of 2012 and 28 percent compared to Jan.-July 2011.

So, as of Aug. 1, 2012, the rate of M2 was 11.971.0 billion manat compared to 9.351.4 billion manat as of Aug. 1, 2011 and 10.997.2 billion manat as of early 2012.

The amount of cash money supply (M0) as of Aug. 1, 2012 hit 8.012.3 billion manat compared to 6.199.0 billion manat as of Aug. 1, 2012 and 7.158.2 billion manat as of Jan.1, 2012.

As of Aug. 1, 2012, Broad Money Supply (M3) totaled 14.703.0 billion manat compared to 11.921.2 billion manat in Aug. 1, 2011 and 13.903.2 billion manat as of early 2012.

The transaction money (M1) amounted to 9.671.2 billion manat as of Aug. 1, 2012 compared to 7.679.8 billion manat as of early Aug. 2011 and 8.824.8 billion manat as of early 2012.

Parameters of monetary market, in bln manat

	Amount as of Aug. 1, 2012
Money mass in extensive understating (М3)	14703,0
Money mass on manat (М2)	11971,0
Cash in manat (М0)	8012,3
Non-cash in manat	4001,9

As of Aug. 1, the reserve money amounted to 9.039.6 billion manat. According to the Central Bank of Azerbaijan, the monetary base increased by 33.2 percent per annum, while by 3.1 percent during seven months.

As of Aug. 1, 2012, the monetary base in manat totaled 8.940.2 billion manat compared to 6.858.1 billion manat as of Aug. 1, 2011, 8.275.3 billion manat as of Jan. 1, 2012.

During the reported period, money in circulation amounted to 8.458.1 billion manat, while as of Aug. 1, 2011 this figure was 6.521.2 billion manat, as of Jan. 1, 2012 - 7.658.5 billion manat.

The bank reserves were equal to 563.7 million manat (408.5 million manat) or by 38 percent more than as of Aug. 1, 2011, and by 31.8 percent less than the index as of early 2012 (826.4 million manat).

The ratio of the mass of cash in circulation to the money base amounted to 93.6 percent during the reporting period compared to 94.0 percent as of Aug. 1, 2011 and 90.2 percent as of the Jan. 1, 2012.

It should be noted that in 2010 the monetary base increased by 32.8 per cent in Azerbaijan.

Credit market of Azerbaijan

Azerbaijani banks increased lending to the Azerbaijani economy by 8.8 percent during seven months and by 18.7 percent compared to the same period of 2011.

According to the CBA, the banks delivered loans totaling 10.826.4 billion manat as of early August, 2012 (including 7.183.9 billion manat in national currency (66.35 percent) and 3.642.5 billion manat in freely convertible currency) 33.65 percent.

As of early 2012, the figure was 9.950.3 billion manat (6.426.5 billion manat in national currency and 3.523.8 billion manat - in foreign currency), and as of August 1, 2011 - 9.120.2 billion (5.723.3 billion manat and 3.396.9 billion manat in freely convertible currency).

Of the total portfolio, loans worth 715.1 million manat (6.78 percent) were overdue compared to 633.8 million manat as of Jan.1, 2012, about 581.1 million manat as of Aug.1, 2011. Statistics of overdue loans does not include similar loans of non-bank credit institution Aqrarkredit. The overdue loans increased by 12.8 percent during seven months, while by 23.1 percent per annum.

Short-term loans as of Aug. 1, 2012 amounted to 3.001.3 billion manat (including overdue loans worth 386.3 million manat) compared to 3.051.2 billion manat (including overdue loans worth 326.2 million manat) as of Jan. 1, 2012, about 3.014.4 billion manat (293.6 million) as of Aug. 1, 2011.

During seven months, the amount of short-term loans decreased by 1.6 percent, but by 0.43 percent per annum. As of early July 2012, 34.45 percent of short-term lending accounted for feely convertible currency.

Long-term loans as of Aug. 1, 2012 amounted to 7.825.1 billion manat (including 328.9 million manat overdue loans) compared to 6.899.1 billion manat (307.6 million overdue loans) as of early 2012 and 6.105.8 billion manat (287.5 million manat) as of Aug. 1, 2011. During seven months, the amount of long-term lending increased by 13.4 percent, but by 28.16 percent per annum. As of early Aug. 2012, 33.3 percent of long-term lending accounted for freely convertible currency.

According to the CBA, the only state bank of the country (the International Bank of Azerbaijan) granted loans totaling 3.734.6 billion manat with a specific weight of 34.5 percent, and private banks - 6.780.7 billion manat with a specific weight of 62.6 percent. The remaining 2.9 percent fall to the share of non-bank credit organizations, which delivered loans worth 311.2 million manat.

The loans given to the population in Azerbaijani regions hit 1.392.5 billion manat as of Aug. 1 or 12.86 percent of the total volume of the loan portfolio of the banks.

According to the CBA, the figure was equivalent to 9,433.86 billion manat in Baku, including 6.122.93 billion manat as loans in national currency. In the reported period, interest rate of loans averaged 15.7 percent by August, including 15 percent in Baku.

In the period, the amount of crediting was equivalent to 330.31 million manat (average interest rate of 18.2 percent) in the Absheron economic region, 302.87 million manat (22.6 percent) in the Aran region, 33.81 million manat (21.5 percent) in the Mountain Shirvan region, 303.24 million manat (20.8 percent) in the Ganja-Gazakh region, 121.57 million manat (20 percent) in the Guba-Khachmaz region, 122.34 million manat (24.3 percent) in the Lenkoran region, 84.58 million manat (23.4 percent) in the Sheki-Zagatala region, 14.05 million manat (22.5 percent) in the Upper Karabakh region, 2.35 million manat (18.3 percent) in the Kalbajar-Lachin region, 77.43 million manat (12 percent) in the Nakhchivan region.

Most of all loans are granted to households in Azerbaijan. According to the CBA, in Jan.-July 2012 households received 35.4 percent or loans worth 3.833.8 billion manat.

The sphere of trade and services (26.0 percent or 2.816.2 billion manat) ranks second, the construction sector of real estate (9.5 percent or 1.029.6 billion manat) ranks third.

About 6.1 percent or 660.2 million manat accounted for industry, 4.7 percent (505.6 million manat) - agriculture and processing, 3.7 percent or 396.9 million manat - transport and communications, 2.5 percent (282.9 million manat) - power engineering, natural resources, 0.4 percent or 45.2 million manat of loans - rest areas.

As of the first seven months of 2012, Azerbaijani banks reduced interest rates on loans in local and foreign currency.

As of Aug. 1, the average rate on bank lending to the Azerbaijani economy in national currency amounted to 15.61 percent compared to 16.27 percent as of Jan. 1, 2012, 16.40 percent as of Aug. 1, 2011.

The average rate on bank lending in freely convertible currency was 15.43 percent compared to 16.79 percent and 16.42 percent accordingly.

The average rate on bank lending to a legal entity in national currency amounted to 13.63 percent as of early August compared to 14.53 percent as of Jan. 1, 2012 and 14.41 percent by Aug. 1, 2011.

The average rate on bank loans of a corporate client in freely convertible currency was 12.56 percent compared to 14.30 percent and 13.67 percent respectively.

As of Aug. 1, the average rate on bank credit for a physical entity in national currency amounted to 18.54 percent compared to 19.06 percent as of Jan. 1, 2012 and 19.65 percent by Aug. 1, 2011.

As of Dec. 1, the average rate on bank lending to individuals in national currency amounted to 19.19 percent. The figure hit 19.18 percent the previous month, on Jan. 1, 2011 - 19.84 percent, on Dec. 1, 2010 - 19.28 percent.

The average rate on bank credit for an individual client in freely convertible currency amounted to 22.11 percent compared to 22.90 percent and 23.09 percent accordingly.

Banking sector of Azerbaijan

As of seven months of 2012, the depositary base of Azerbaijani banks reduced by 2.34 percent and increased by 15.85 percent compared to the same period of 2011.

According to the CBA, as of early August, the total amount of bank deposits, deposits of physical and legal entities, non-resident deposits and deposits of state governance totaled 9.668.7 billion manat compared to 9.447.0 billion manat as of early 2012 and 8.345.8 billion manat as of early August 2011.

The deposits in national currency - manat hit 4.427.8 billion manat, of which 1.787 manat - demand deposits, 2.640.8 billion manat - urgent deposits. The deposits in foreign currency hit 5.241 million manat (1.702.2 billion manat and 3.538.8 billion manat respectively).

As of Jan.-July 2012, the volume of physical entities' deposits in banks in Azerbaijan increased by 7.1 percent, while the volume of legal entities' deposits reduced by 0.8 percent. Individual clients' deposits increased by 24.59 percent compared to July 2011, while corporate clients' deposits increased by 9.3 percent.

By early August, the volume of physical entities' deposits in the banks amounted to 4.415.2 billion manat compared to 4.119.8 billion manat in early 2012 and 3.543.6 billion manat - as of August 1, 2011.

According to the CBA, some 2.484.6 billion manat (56.27 percent) were placed by the population in the national currency - manat, 1.930.7 billion manat - in freely convertible currency.

There was a situation when cash deposits of Azerbaijan's population in the national currency exceed cash deposits in foreign currency. It should be stressed that the same situation was in December, November and August.

As of 2011, 2.281.6 billion manat (55.4 percent) of the population were placed in the national currency - manat, 1.838.1 billion manat - in hard currency.

Deposits of the population, drawn to the banking system from the Azerbaijani regions (areas of the country, except for Baku), as of Aug. 1, 2012 amounted to 370.24 million manat or 8.4 percent of total volume of bank deposits.

The volume of deposits on Baku amounted to 4.044.99 billion manat, while the deposits in national currency hit 2.201.38 billion manat.

The average percent rate in the country during this period was 8.6 percent while 8.8 percent in Baku.

The amount of deposits on Absheron economic region amounted to 108.14 million manat, with an average rate of 9.1 percent, Aran - 63.62 million manat at 4.6 percent, the Mountain-Shirvan - 8.56 million manat at 6.3 percent, Ganja -Gazakh - 78.13 million manat at 6.7 percent, Guba-Khachmaz - 27.76 million manat at 6.9 percent, Lankaran - 26.39 million manat at 6.8 percent, Sheki-Zagatala - 24.06 million manat at 5.3 percent, the Upper Karabakh - 8.75 million manat at 3.8 percent, Kalbajar-Lachin - 1.92 million manat at 5.4 percent, Nakhchivan - 22.86 million manat at 3.2 percent.

By early Aug. the volume of legal entities' deposits amounted to 2.499.5 billion manat compared to 2.519.5 billion manat as of early 2012 and 2.207.1 billion manat as of Aug. 1, 2011.

By early August, the volume of deposits of non-financial organizations hit 2.754 billion manat compared to 2.807.6 billion manat as of early July and 2.595.1 billion manat as of Aug. 1, 2011.

On August 1, 2012 Azerbaijani banks significantly raised the rates on deposits of legal entities in manat, but reduced the rates for the same deposits in freely convertible currency.

According to the CBA, the average rate on deposits in manat as of Aug. 1, 2012 was 10.36 percent compared to 10.26 percent as of Jan. 1, 2012, 10.69 percent as of Aug. 1, 2011.

The average rate on deposits in foreign currency amounted to 10.77 percent compared to 11.11 percent and 11.16 percent respectively.

As of Aug. 1, 2012, the average rate on physical entities' deposits in manat was 10.67 percent compared to 10.76 percent as of early Jan. and 11.42 percent as of early Aug. 2011. The average rate on individual clients' deposits in foreign currency amounted to 10.98 percent compared to 11.27 percent and 11.28 percent respectively.

As of early Aug. 2012, the average rate on legal entities' deposits in manat was 7.01 percent compared to 5.60 percent as of Jan. 1, 2012 and 5.65 percent as of Aug. 1, 2011. The average rate on corporate clients' deposits in foreign currency was 4.44 percent compared to 7.02 percent and 7.46 percent respectively.

Financial activity of the banks

There were 33 banks operating at a profit in Azerbaijan as of late July. The number decreased by 2 compared to June, and did not change compared to July 2011.

The number of profitable banks today is 39.

According to the CBA, the total profit of the banking system increased by 36.13percent per year and hit 145.28 million manat as of Aug. 1 or by third more compared to Jan.-June 2012.

The number of unprofitable banks increased by 4 to 10 per month or by 1 less compared to the same period of 2011.

Losses of 10 banks hit 97.09 million manat or 8.44 times more than in January-July 2011.

Financial results of the banks' activity (after paying taxes) in million manat

periods	Number of profitable banks	The total profit of the banking system (profitable banks)	Number of unprofitable banks	The total loss of the banking system (unprofitable banks)	Total profit (+) or loss (-) obtained by banks
July 1, 2011	33	106,72	10	11,51	95,21
July 1, 2012	33	145,28	10	97,09	48,19

Despite the increase in losses among some banks and ceased activity of two Azerbaijani banks RoyalBank and Birlikbank in July, the Azerbaijani Central Bank has announced about a record growth of the banking system assets.

According to the CBA, as of August 1, the banks' assets reached a new absolute record level from 14.778.8 billion manat to 14.978.6 billion manat as of July 1. It exceeded the previous record level worth 14.820.9 billion manat as of June 1, 2012. The assets of the banking system have a positive trend in 2012. They equaled 14.259.2 billion manat in early 2012. The assets increased by 7.4 percent from early 2012, while by 12.81 percent per annum.

In July, the capitalization of the Azerbaijani banking sector increased by 2.04 percent or by 7.09 percent compared to early 2012, amounting to 2.268.6 billion manat as of Aug. 1.

According to the CBA, the number of banks with capital exceeding 10 million manat was 39 as of July, reducing by one compared to June, and by 3 compared to late 2011. The share of this category of banks in the total capital of all banks in the country in July was 99 percent compared to 99 percent in June and 99.5 percent as of early 2012.

Two banks' capital (with a weight of 0.2 percent) was formed in the range of 5 million manat to 10 million manat, one bank (0.2 percent) - from 3.5 million to 5 million manat manat, another bank - to 3.5 million manat.

Stock market

The total turnover of transactions on all instruments on Baku Stock Exchange (BSE) for January-July 2012 totaled 7.036 billion manat, or by 54.6 percent more compared to the same period of 2011.

Such an increase in stock market in the country is ensured by increasing the state securities market by 61.42 percent, while the corporate securities market declined by 27.83 percent.

The state securities market reached 6.78 billion manat influenced by the increase in repo transactions by 72.57 percent and growth of operations with the notes of the Central Bank. The primary market increased by 37.25 percent, and secondary - by 30.68 percent.

The reduction of the corporate securities market is explained by the decrease in the volume of transactions with corporate bonds more than a half. The volume of the corporate securities market was 250.6 million manat in January-July.

Comparative table on the results of trades of Corporate Securities at BSE (January-July 2012)

Market segments	July 31, 2012		July 31, 2011		Percentage ratio
	Volume of transactions, AZN	Number of deals	Volume of transactions, AZN	Number of deals
Corporate bonds- (placement)	37 215 335,00	58	91 885 972,50	56	40,5%
Corporate bonds - (secondary market)	148 808 101,58	50	184 748 225,66	55	80,55%
Stocks - (placement)	59 630 435,35	93	65 868 332,00	106	90,53%
Stocks - (secondary market)	4 951 671,15	2 044	4 719 614,34	2 095	104,92%
CS Market Total	250 605 543,08	2 245	347 222 144,50	2 312	72,17%

Comparative table on the results of trades of Government Securities at BSE (January-July 2012)

Market segments	July 31, 2012		July 31, 2011		Percentage ratio
	Volume of transactions, AZN	Number of deals	Volume of transactions, AZN	Number of deals
GB - (AR MF) (placement)	59 757 344,13	23	178 869 168,77	105	33,41%
GB - (AR MF) (secondary market)	7 348 651,92	5	26 616 863,09	25	27,61%
Notes (AR CB) - (placement)	689 155 740,27	162	502 122 741,33	184	137,25%
Notes (AR CB) - (secondary market)	12 486 939,02	8	9 555 687,77	5	130,68%
Repo operations	6 017 007 047,38	776	3 486 717 782,68	727	172,57%
GS Market Total	6 785 755 722,72	974	4 203 882 243,64	1 046	161,42%

Abbreviations:
- GB - government bonds,
- GS - government securities,
- CB - corporate bonds,
- CS - corporate securities.

The Azerbaijani National Depository Center expands the number of contracts with joint stock companies to maintain and store shareholders' registers.

According to the center, six agreements were signed in July compared to two agreements in June, their complete absence in May, six agreements in April, five agreements in March, eight agreements in February and 6 agreements in January. Around 33 agreements were signed in 2012 compared to 35 agreements for 2011 (the best index was registered in July - 8 contracts).

The Azerbaijani National Depository Center stressed the decrease in the stock market turnover in July 2012. Phenomenal growth rates were recorded in 2011, when the turnover of the securities market in the country exceeded the turnover for 2010 by 4.69 times.

According to the center, around 328 transactions with securities with a nominal value of 94.7 million manat were signed in July 2012 compared to 371 transactions with securities worth 61.4 million manat in June and 150 transactions with a total nominal value of 27.55 million manat in January this year. The turnover on 2,654 transactions for 2012 totaled 325.01 million manat.

Around 35 deals on placing the shares worth 29.172.240 million manat, 260 stock exchange transactions worth 63.859.501 million manat and 24 off-exchange transactions worth 1.658.762 million manat were concluded in July. The placement on 138 transactions hit 119.016.312 million manat, off-exchange transactions on 398 transactions - 44.556.161 million manat, stock exchange transactions on 2,050 transactions - 149.821.559 million manat in January-July.

Payment card market

The number of payment cards in Azerbaijan fell by 0.37 percent - to 4.808 million units in July. The number increased by 8.56 percent compared to the same period of 2011.

According to the CBA, the total turnover of payment cards through ATMs and POS-terminals in July amounted to 811 million manat, and the total number of operations - 5.018 million units. The number of debit card transactions totaled 4.663 million units worth 722 million manat.

Around 4.217 million transactions amounting to 675 million manat of the total number of debit card transactions were conducted through the ATM, 302,000 transactions amounting to 34 million manat through POS-terminals. Around 355,000 transactions totaling 89 million manat were conducted via credit card in July 2012.

Around 127,000 operations worth 39 million manat of the total number of credit card transactions were conducted through the ATM and 70,000 transactions worth 17 million manat through POS-terminals.

As of August 1, 2012, around 2,195 ATMs operated in the country, including 1,225 ATMs are located in Baku, 970 - in other cities and regions. Their total number for the year increased by 193 units, or 9.64 percent.

As of August 1, 2012 the number of POS-terminals totaled 36,523 units, of which 33,340 are Baku, 3,183 units in other cities and regions.

Their number increased by 25,251 or 3.24 times in July 2011.

As of January 1, 2010, there were 1,694 ATMs and 8,657 POS-terminals, as of January 1, 2009 - 1.515 ATMs and 8,124 POS-terminals, as of January 1, 2008 - 1,317 ATMs and 5,309 POS terminals, and as of January 1, 2007 - 1,080 ATMs and 2,070 POS-terminals.