PremiumReview of monetary sector in Azerbaijan (January 2015)

The Central Bank of Azerbaijan (CBA) states that a process of reducing its foreign exchange reserves, which began in December, continued in January.

According to the CBA, as of February 1, 2015, the volume of foreign exchange reserves totaled $12.680 billion compared to $ 13.758 as of January 1, 2015. For comparison, the CBA currency reserves reached $14.996 billion as of December 1 and $15.193 billion (an absolute record) as of August 1, 2014. The volume of reserves as of January 2015 is in line with the level as of July 1, 2013 ($12.720 billion).

A decrease in the CBA foreign exchange reserves in January 2015 amounted to $1.077 billion (-7.8 percent). They decreased by 8.3 percent ($1.237 billion) in December 2014. In other words, the bank lost $2.315 billion for a couple of months.

A statistics decline in a total volume of the CBA foreign exchange reserves is connected with the factors arising from the currency diversification in accordance with the strategy of managing foreign exchange reserves. The foreign exchange reserves are managed through the diversification of the US dollar, the euro and the British pound in various freely convertible currencies in accordance with the CBA investment strategy to preserve the stocks and ensure profitability.

Currency market and AZN rate

A demand for the US dollar increased in Azerbaijan in mid-December 2014 following the CBA intervention. Thus, the intervention was conducted in the amount of $1.127 billion to maintain the AZN exchange rate at a stable level.

In January-November 2014 the CBA bought $1.27 billion from the currency market of the country to prevent a sharp appreciation of the AZN versus the US dollar.

The crisis in Russia and neighboring countries in December had a psychological impact on the currency market of Azerbaijan. The rates of the ruble and national currencies of other countries sharply reduced due to the crisis.

As a result, the demand for the dollar increased in the country in December 2014. The intervention in the amount of $1.127 billion was conducted.

The stability of the AZN rate was maintained in January. The net increase in foreign exchange reserves amounted to $143 million.

Thus, the stability was maintained on the foreign exchange market of the country in January and the CBA returned to the former intervention regime.

The AZN rate in January 2015 remained stable at 0.7844 AZN per dollar during the month.

As opposed to the US dollar, the euro rate depreciated versus Azerbaijani AZN in January. On January 26, the official exchange rate was set at 0.877 AZN (less than 88 "cents") for 1 euro. Such a cheap euro rate versus Azerbaijani AZN was not observed.

The rate was 0.9367 AZN versus euro in 2015. For the first time in the history, the rate dropped by less than 90 "cents" - up to 0.8897 AZN on January 23. As a result, the euro lost 5.13 percent of the value of the AZN in Azerbaijan in January.

Azerbaijani monetary market

The Central Bank's important objective is to manage the money supply at an adequate macroeconomic and financial stability level, in terms of continuous growth of foreign exchange reserves of the country and increased liquidity of the banking system.

The money supply rate (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) increased by 1.6 percent in January 2015 compared to the same period of 2014, the Central Bank of Azerbaijan's report says.

The money supply rate (M2) amounted to 16.236 billion AZN as of January 2015 compared to 15.983 billion AZN as of February 1, 2014, according to the report.

The amount of cash money supply (M0) decreased by 5.7 percent during a year and amounted to 9.348 billion AZN compared to 9.912 billion AZN as of early February 2014.

As of January 2015, Broad Money Supply (M3) totaled 20.568 billion AZN or 8 percent more compared to January 2014 (19.045 billion AZN).

The transaction money (M1) decreased by 4.3 percent during a year and amounted to 11.753 billion AZN compared to 12.277 billion AZN as of January 2014.

Parameters of monetary market, in billion AZN:

	Volume as of Feb. 1, 2015
Money mass in extensive understating (М3)	20 568,50
Money mass on AZN (М2)	16 236,5
Cash in AZN (М0)	9 347,93
Non-cash in AZN	6 888,57

The expanded monetary base in Azerbaijan totaled 10.760 billion AZN as of Feb. 1, 2015, according to a report.

In annual terms, the monetary base in Azerbaijan decreased by 3.43 percent. For comparison, as of January 2014, this figure was 11.143 billion AZN.

As of Feb. 1, 2015, the monetary base in AZN amounted to 10.551 billion AZN versus 11.038 billion AZN on Feb. 1, 2014, according to the CBA.

In the mentioned period, the volume of money in circulation amounted to 10.145 billion AZN, while on Feb. 1, 2014 this figure was 10.530 billion AZN.

The ratio of the mass of cash in circulation to the monetary base was 94.3 percent as of Feb. 1, 2015, reducing by 0.2 percent versus the same index as of Feb. 1, 2014.

Bank reserves stood at 604.5 million AZN, or 1.02 percent more than as of Jan. 2014 (598.4 million AZN).

Azerbaijan's loan market

Azerbaijani banks increased lending to the economy by 20 percent in January 2015, compared to the same period of 2014, the report said.

The banks issued loans totaling around 18.580 billion AZN, including around 13.561 billion AZN (73 percent) in national currency and 5.018 billion AZN (27 percent) in freely convertible currency as of February 1, 2015, according to the CBA report.

By comparison, the figure neared 15.485 billion AZN (around 11.140 billion AZN in national currency and over 4.344 billion AZN in freely convertible currency) as of 2014.

Of the total portfolio, borrowings and loans worth 1.031 billion AZN (5.55 percent) were overdue compared to 815.1 million AZN (5.3 percent) as of 2014.

The statistics of overdue loans does not include similar loans of Aqrarkredit non-banking credit institution. The share of overdue loans has increased by 26.5 percent in a year.

The volume of short-term loans amounted to 3.844 billion AZN (including overdue loans worth 407.6 million AZN) as of 2014, compared to 3.369 billion AZN (including overdue loans worth 372.3 million AZN) on the results of January 2014. The volume of short-term loans has in the economy increased by 9.5 percent in a year.

The volume of long term loans amounted to 14.736 billion AZN (including 623.4 million AZN worth overdue loans) as of February 2015, compared to 12.116 billion AZN (including 442.8 million AZN worth overdue loans) as of January 2014. The volume of long term loans has increased by 40.8 percent in a year.

The credit portfolio of the only state bank in the country, the International Bank of Azerbaijan, neared 6.391 billion AZN with the specific weight of 34.4 percent, while private banks issued loans worth around 11.629 billion AZN with a specific weight of 62.6 percent.

The remaining 3 percent fell to the share of non-bank credit organizations which issued 559.5 million AZN, according to the CBA.

Azerbaijani banks increased the consumer lending volume by 21.5 percent in January 2015 compared to the same period of 2014, the report said.

The share of consumer loans in a total volume of the banks' loan investments amounted to 44 percent, or 7.724 billion AZN. For comparison: their share accounted for 40.9 percent, and the amount of issued loans - 6.359 billion AZN in January 2014.

The trade and services (14.3 percent or 2.648 billion AZN) ranked second on the share in the total loan portfolio of banks. The construction and real estate sector (13.7 percent or 2.548 billion AZN) ranked third.

Around 10.8 percent of the total volume of lending to the real sector of Azerbaijan was directed to the industry and production. In nominal terms it amounts to 2.007 billion AZN.

For comparison: in January 2014 the share of lending to the industrial sector accounted for 11.9 percent of a total volume of funds transferred by the banks into the country's economy.

The share of transport and communication hit 3.9 percent (726.5 million AZN), agriculture and processing reached 4.5 percent (842.5 million AZN), energy, chemistry, and natural resources - 1.3 percent (235.7 million AZN).

The loans given to the population in Azerbaijan's districts totaled 3.156 billion AZN as of January 2015, or 16.99 percent of the banks' total loan portfolio, the report says.

This figure is 42.6 percent more than in the same period of 2014.

The figure hit 15.423 billion AZN in Baku. Here the loans in national currency (AZN) amounted to 11.060 billion AZN.

In January 2015, the average interest rate on loans throughout the country was 13.8 percent, while in Baku this index stood at 12.3 percent.

The lending volume in the Absheron Economic district totaled 610.7 million AZN at an average rate of 19.7 percent.

In other economic districts the lending index was as follows: Aran - 1.107 billion AZN at a rate of 22 percent, Mountainous Shirvan - 140.99 million AZN at a rate of 23.5 percent, Ganja-Gazakh - 431 million AZN at a rate of 22 percent, Guba-Khachmaz - 143.8 million AZN at a rate of 20.3 percent, Lankaran - 328.9 million AZN at a rate of 23.9 percent, Shaki-Zagatala - 160.6 million AZN at a rate of 20.6 percent, the Upper Karabakh - 85.3 million AZN at a rate of 21.1 percent, Kalbajar-Lachin - 33.95 million AZN at a rate of 25.7 percent, Nakhchivan - 113.7 million AZN at a rate of 13.4 percent.

Azerbaijani banks decreased interest rates on loans in local currency and in foreign currency, the report said.

The average rate on bank lending to the economy of Azerbaijan in national currency amounted to 13.71 percent compared to 14.16 percent as of late January 2014.

The average rate on bank lending in freely convertible currency made up 14.28 percent compared to 14.65 percent as of late January 2014.

The average rate on bank lending to legal entities in national currency amounted to 9.74 percent compared to 10.98 percent as of late January 2014. The average rate on bank lending to corporate clients in freely convertible currency amounted to 9.22 percent compared to 10.52 percent.

As of February 1, 2015, the average rate on bank lending to physical entities in national currency amounted to 18.59 percent compared to 17.99 percent as of early February 2014.

The average rate on bank loans to individual customers in freely convertible currency was 22.27 percent compared to 20.82 percent as of early February 2014.

Mortgage lending

The Azerbaijan Mortgage Fund (AMF) under the Azerbaijani Central Bank delivered loans amounting to 4.2 million AZN in January 2015 or 23.5 percent more than in the same period of 2014, the report said.

Mortgage loans worth more than 630.6 million AZN, including 97.1 million AZN in 2014 have been delivered since launching financing through the AMF, including 112.9 million AZN in 2013, 74.77 million AZN - in 2012, 95.64 million AZN - in 2011, 97.08 million AZN - in 2010, 76.9 million AZN - in 2009, 70.2 million AZN - in 2007 and 5.6 million AZN - in 2006.

The total amount of refinancing the loans delivered by the banks earlier, hit 5 million AZN in January 2015, according to the report.

The average amount issued by AMF authorized banks is 40,174 AZN (this figure amounted to 39.513 AZN in January 2014), the average term of loan issue - 278 months (278 months), the average interest rate is 6.77 percent (versus 6.88 percent in 2013), and the average monthly payment is 297.4 AZN (319.8 AZN).

Currently, the maximum amount of a common mortgage loan through the AMF is 50,000 AZN at a rate of 8 percent with a payback period of 25 years. Terms under the social mortgage are 50,000 AZN at an annual rate of 4 percent with a payback period of 30 years. The initial payment under a social mortgage is 15 percent, whilst a conventional loan is 20 percent.

Conditions of mortgage lending are as follows: Loans must be issued in Azerbaijani AZN and only to Azerbaijani citizens and the mortgage can only be for an apartment or private house.

The volume of mortgage lending must not exceed 80 percent of the market price and the monthly payment must not exceed 70 percent of the debtor's monthly income. It is compulsory to have an agreement on life insurance.

Preferential conditions are granted to family members of war victims, national heroes, internally displaced persons, civil servants with at least a three years' experience, PhDs and those making special contributions to sport as well as to the military with at least a three-year service term. Each family having the right to such a mortgage can only use the opportunity once.

At present, the authorized banks of the Mortgage Fund are 28 banks [some 45 banks operate in the country].

Some 21 insurance companies [their total number is 27] and 15 appraisal organizations are the participants of the mortgage market.

Azerbaijan's banking sector

The economic cycles, seasonal factors and the attitude of investors, dictated by a variety of causes impact on the dynamics of deposits.

As of January 2015, the depositary base of Azerbaijani banks increased by 19.33 percent, according to the report.

As of February 1, 2015, the total amount of bank deposits and deposits of physical and legal entities totaled 15.135 billion AZN compared to 12.683 billion AZN as of early February 2014, according to the CBA.

Around 7.330 billion AZN fell to cash, 2.457 billion AZN were demand deposits, and 4.873 billion AZN term deposits. The funds in foreign currency amounted to 7.805 billion AZN (1.822 billion AZN and 5.983 billion AZN, respectively).

The deposits of physical entities increased by 10.38 percent, while the volume of legal entities' deposits by 28.6 percent compared to January 2014.

As of January 2015, the volume of physical entities' deposits in the banks amounted 7.121 billion AZN compared to 6.451 billion AZN in early February 2014.

Around 4.276 billion AZN (60.05 percent) of the population's funds were placed in the national currency (a 3.3 percent decrease compared to the previous month), while 2.845 billion AZN in freely convertible currency (a 2.9 percent growth), according to the Central Bank.

The Azerbaijani population's deposits in the national currency in the banks have prevailed over those in foreign currency since 2012.

As of January 2015, the volume of deposits of financial organizations amounted to 4.247 billion AZN compared to 3.383 billion AZN as of January 2014. The volume of deposits of non-financial organizations totaled 3.767 billion AZN compared to 2.848 billion AZN as of January 2014.

The total volume of deposits of legal entities totaled 8.014 billion AZN compared to 6.232 billion AZN as of January 1, 2014.

The deposits of the population testify to the confidence in the banking system. They also play a crucial role as a resource for the banks' normal activity.

At present, there is no outflow of deposits from the banks in Azerbaijan despite the term of the six-year moratorium on exempting the dividends on the population's deposits from paying an income tax expired in late 2014.

The taxation of dividends on deposits in banks operating in Azerbaijan and branches of foreign banks, introduced from 2015, will apply to all deposit agreements with physical entities.

The tax on the depositors' dividends in Azerbaijan will affect the interest accumulated from 2015.
According to the amendments to the Tax Code of Azerbaijan, approved by the Azerbaijani parliament, some interest income up to 500 AZN per year, received on a deposit in a bank, has been exempt from an income tax. The tax rate on this income is 10 percent.

A moratorium on the imposition of an income tax on the citizens' income, received on the population's deposits in banks and other credit organizations in Azerbaijan, expired in late 2014.

The moratorium has been in force since 1999.

The population's deposits, attracted to Azerbaijan's banking system from the country's districts (except for Baku), totaled 571.07 million AZN in January 2015, or 8.02 percent of the total bank deposits.

The figure increased by 18.27 percent compared to January 2014.

The volume of deposits in Baku was 6.550 billion AZN, while some 3.843 billion AZN accounted for the deposits in the national currency.

In this period, the average interest rate throughout the country hit 8 percent and in Baku - 8 percent.

Thus, Baku is still the leader on such indices as attracting the population's deposits by the banks.

The Absheron economic region (173.95 million AZN at an average rate of 8.5 percent) is in the lead in terms of drawing the deposits of the population in the districts.

During this period, the volume of deposits in the Mountainous Shirvan - 15.5 million AZN at a rate of 6.2 percent, Ganja-Gazakh - 69.2 million AZN at a rate 5.8 percent, Guba-Khachmaz - 21.9 million AZN at a rate of 6.1 percent, Lankaran - 46.9 million AZN - the rate of 6.6 percent, Sheki-Zagatala - 24.1 million AZN - the rate of 5.5 percent, Upper Karabakh - 14.1 million AZN - 4 percent, Kalbajar-Lachin - 8.3 million AZN - 4.9 percent, Nakhchivan - 29.4 million AZN - the average rate of 3.2 percent, the Aran economic region - 167.7 million AZN - the average rate of 7.1 percent.

The Azerbaijani banks continue to reduce interest rates on deposits both in national and in freely convertible currency, according to the report.

The average rate on deposits in AZN for February 1, 2015 made up 8.82 percent compared to 9.42 percent in February 1, 2014, the statistical report of the CBA said. The average rate on deposits in foreign currency amounted to 8.93 percent versus 9.66 percent in early February 2014.

As of February 1, 2015, the average interest rate on deposits of individuals in AZN made up 9.41 percent, while on February 1, 2014, it was 9.8 percent. The average rate on deposits from individual customers in foreign currencies amounted to 10.05 percent versus 10.19 percent in early February 2014.

The average rate on deposits of legal entities in AZN made up 5.66 percent at the beginning of February 2015 versus 5.59 percent for February 1, 2014, the report said. The average rate on deposits from corporate clients in foreign currency amounted to 4.36 percent versus 3.35 percent in early February 2014.

Banks' financial activity

As of early 2015, there are 45 banks in Azerbaijan: 43 commercial banks and 2 state-owned banks. There are 23 banks with foreign capital. The share of foreign capital ranges from 50 to 100 percent in eight of them, while up to 50 percent in 13 banks. There are also two local branches of foreign banks.

The CBA removed restrictions on the activity of "Caspian Development Bank" in January. It was previously named as "Kovsar Bank".

Caspian Development Bank joined the Azerbaijan Deposit Insurance Fund in connection with obtaining permission to accept the physical entities' deposits.

There are plans to join the Azerbaijan Mortgage Fund in the future.

Thus, the bank once again started to render the traditional banking services, by refusing to work according to the rules of Islam. This happened as a result of changes in the composition of shareholders, who are citizens of Azerbaijan.

The total profit of Azerbaijan's banks exceeds the total loss by 17.57 times as of January 2015, the report said.

The profit of 40 banks was 70.94 million AZN, while the loss of five banks stood at 4.037 million AZN, according to the report. This allowed the banking system to get net profit of 66.9 million AZN.

The number of profitable banks increased by 2 compared to January 2014, and their total profit increased by 36.6 percent. The number of unprofitable banks remained unchanged compared to the same period of 2014 but their total loss increased by 41.65 percent.

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
Feb. 1, 2014	38	51,92	5	-2,85	49,07
Feb. 1, 2015	40	70,94	5	-4,037	66,9

The Azerbaijani banking sector's capitalization rose by 22.4 percent in January 2015, standing at 4.212 billion AZN as compared to the same period of 2014, the report said.

The report said there were 9 banks with a capital exceeding 100 million AZN in the reporting period. This index did not change compared to January 2014.

The specific weight of this category of banks in the total capital of all banks in Azerbaijan stood at 57.3 percent in the reporting period.

Nine banks' capital has been formed from 60 million AZN to 100 million AZN, while 23 banks' capital - from 50 million AZN to 60 million AZN.

The share of these categories of banks in the total capital of all banks in the country following the reporting period amounted to 13.9 percent and 28.1 percent respectively. Four banks' capital is less than 50 million AZN (0.7 percent).

The CBA's requirement for the banks' minimum total capital was set at 50 million AZN by late 2014.

As of February 1, 2015, the assets of the Azerbaijani banking sector amounted to 24.8 billion mantas (AZN) compared to 20.55 billion AZN on the results of January 2014, the report said.

The bank assets increased by 20.68 percent during a year, according to the Central Bank of Azerbaijan.

The basis of the assets of the banking sector (69.2 percent) accounted for loans delivered to the clients in the amount of 17.18 billion AZN (20.99 percent growth during a year), other assets (2.1 billion AZN with 8.51 percent weight and 18.64 percent growth during a year), investments (1.97 billion AZN with 7.92 percent weight and 15.88 percent growth during a year).

Funds on correspondent accounts on the results of January 2015 were 1.5 billion AZN.

Loans and deposits delivered by the banks to the financial sector amounted to 965.2 million AZN (3.9 percent).

The lion share in the structure of liabilities accounts for deposits standing at 10.8 billion AZN (43.49 percent) as of February 1, 2015, showing an increase of 17.9 percent compared to the same period of 2014. Loans and deposits from the financial sector amounted to 8.37 billion AZN (33.7 percent), increasing by 23.1 percent during a year.

Payment card market

The number of payment cards in Azerbaijan increased by 4.6 percent during the year and hit 6.018 million units as of January 2015, according to the report.

Some 4.697 million units of the total number of cards were debit cards, in particular, 2.441 million - social cards, 1.438 million - salary cards, 818,000 - other cards. The number of credit cards was 1.322 million units.

The total turnover on payment cards via ATMs and POS-terminals amounted to 899 million AZN and the total number of transactions to 6.418 million units in January 2015, according to the report.

The number of transactions on debit cards equaled 686 million units totaling 4.772 million AZN in January 2015.

Of the total number of transactions, around 3.534 million transactions amounting to 604 million AZN were implemented on debit cards via ATMs within the country, and around 303,000 transactions amounting to 47 million AZN via POS-terminals.

Some 1.646 million transactions worth of 214 million AZN were made on credit cards in January 2015.

As many as 552,000 transactions worth 116 million AZN, of the total number of transactions on credit cards, were implemented via ATMs and there were 581,000 transactions worth of 43 million AZN via POS-terminals.

As of February 1, 2015, around 2,618 ATMs operated in the country of which 1,480 are located in Baku and 1,138 in other cities and regions of the country. Their total number increased by 201 units or 8.3 percent during a year.

The number of POS-terminals amounted to 74,584 units of which 50,294 are installed in Baku and 24,290 units in other cities and regions as of February 1, 2015.

The number of POS-terminals increased by 41,539 units or 2.26 times during the year.

Stock market

The total turnover of transactions on all instruments on the Baku Stock Exchange (BSE) in January 2015 stood at 1.934 billion AZN, or by 30.4 percent more compared to the same period of 2014.

The volume of the state securities market hit 33.641 billion AZN (a decrease by 97.14 percent) during the reporting period and the turnover of corporate securities market totaled 1.901 billion AZN (a 5.3 times growth).

The volume of derivatives market amounted to 1.575 billion AZN. Comparative table on the results of trades on the state and corporate sectors at BSE (Jan. 2015):

Market segments	As of Jan. 31, 2015		As of Jan. 31, 2014 года		Percentage ratio
	Volume of transactions (AZN)	Number of deals	Volume of transactions (AZN)	Number of deals
SB (Finance Ministry) - (placement)	0	0	0	0	-
SB (Finance Ministry) -(secondary market)	14 914 881,15	5	4 500 000	3	231,44%
Notes (Central Bank) - (placement)	0	0	24 982 415 48	8	-
Notes (Central Bank) -(secondary market)	0	0	0	0	-
Repo transactions	18 726, 353,15	11	1 150 446 378,09	86	98,37%
SS market, total	33 641 234,3	16	1 179 928 793.57	97	97,14%
CB (placement)	13 073 120,00	2	22 454 610.00	7	41,78%
CB (secondary market)	292 614 251,61	76	173 843 492.13	34	162,24%
Stocks (placement)	18 598 590	7	106 704 390.52	105	82,57%
Stocks (secondary market)	553 690,68	397	223 592.09	278	147,63%
CS Market Total	1 899 938 220,34	482	303 226 084.74	424	526,6%
Derivatives market	1 575 098 568,05	6971	-	-	-
Total:	1 933 579 454,64	7 469	1 483 154 879.01	521	130,4%

The National Depository Center under the Azerbaijani State Securities Committee registered 474 purchase-sale transactions of shares to the amount of 301.75 million AZN at a nominal cost in January 2015.

In January, the Depository Center registered 20 off-exchange transactions to the amount of 975,010 AZN at a nominal value and 10 transactions on the additional issue of 31.9 million AZN at a nominal value.

The volume of off-exchange transactions increased by 7 times compared to the same period of 2014. For comparison, the National Depository Center registered 19 deals worth 144,260 AZN in January 2014.

The volume of exchange transactions increased by 71.1 percent (315 deals worth 176.4 million AZN in January 2014) per annum and the volume of transactions on the additional issue decreased by 4.8 times (120 transactions worth 153.94 million AZN).

The National Depository Center was established on September 18, 1997. The founder and owner of the center's whole package of shares was the Azerbaijani State Property Committee. After the State Securities Committee was established, the center's shares were transferred to it. In this regard, the National Depository Center was re-established by the State Securities Committee on September 8, 1999 and passed the state registration on September 17, 1999.