PremiumReview of monetary sector in Azerbaijan (January-February 2018)

Currency reserves of the Central Bank of Azerbaijan (CBA) amounted to $5.387 billion in February 2018, which is by $1.018 billion (23.3 percent) more than in the same period of last year.

During the month, CBA reserves rose by $6.1 million.

Currency reserves of CBA increased by $1.36 billion or 34.2 percent in 2017 as compared to 2016.

CBA's currency reserves started to decrease in July 2014. The reduction was at a slower pace (within a range of $20 million to $50 million) at the beginning, but a sharp decline began in December 2014 due to an increase in demand for US dollars in the country.

During 2016, the CBA currency reserves increased by 0.9 percent in March, 1.35 percent in April, 3.97 percent in May, 0.7 percent in August, and 0.14 percent in November.

Currency market and manat rate

A fully floating exchange rate regime has been observed in Azerbaijan since early 2018. During this time the CBA did not resort to serious interventions to maintain the manat rate. First, there was a period of destabilization, which was connected with the expectations of the market participants. This led to a significant decrease in the cost of manat.

However, then the market itself settled the rate and it stabilized. Today, the foreign exchange market is a market of supply, rather than demand. The pressure is made to appreciate the manat rate. Taking into account Azerbaijan's strategic goals, appreciation of the manat in the medium term may create problems for the balance of payments, given the current measures to reduce imports and support exports.

AZN/USD rate remained unchanged in January-February 2018.

AZN/USD average rate was 1.7001 manat in February 2018 which is similar with the rates in January 2018 and December 2017.

AZN/EUR rate decreased by 2.33 percent in January-February 2018.

AZN/EUR rate increased by 1.59 percent in February 2018 (in January 2018, AZN/EUR rate decreased by 3.98 percent).

Azerbaijani monetary market

The money supply rate (M2) (cash in circulation outside banks) amounted to 12.74 billion manat as of late February 2018 increasing by 18.40 percent as compared to February 2017, Azerbaijan's Central Bank said in a report.

The amount of cash money supply (M0) increased by 22 percent for the year up to 7.31 billion manat, and Broad Money Supply (M3) totaled 22.87 billion manat or by 13.48 percent more compared to late February 2017.

The transaction money (M1) increased by 26.63 percent during the year up to 10.43 billion manat.

Parameters of monetary market, in million manat:

Azerbaijan's loan market

As of early March 2018, Azerbaijan's credit organizations reduced loan disbursement by 1.7 percent to 11,561.1 million manat compared to the fourth quarter of 2017.

According to the report, the volume of overdue loans has increased by 4.56 percent to 1,700.9 million manat since early 2018. At the same time, the share of overdue loans increased from 13.8 percent to 14.7 percent over the reporting period.

At the end of 2017, the loan portfolio of banks and non-banking credit organizations amounted to 11,757.8 million manat. As for overdue loans, the volume of overdue loans ranged from 1.6 billion manat to 1.89 billion manat in 2017.

Lending in national currency as of early March amounted to 7,007.3 million manat (an increase by 0.8 percent since early 2018) and the share in the loan portfolio of banks reached 60.6 percent. Lending in foreign currency amounted to 4,553.8 million in manat equivalent (a decrease by 5.2 percent since early 2018) with a specific weight of 39.4 percent.

The volume of short-term loans amounted to 2,145.4 million manat, long-term loans - 9,415.7 million manat.

Distribution of the loan portfolio by economic sectors (at the end of January 2018):

Thus, 15.7 percent (1,814.2 million manat) of all loans in the country accounted for state banks, 80.7 percent (9.333 million manat) - private banks, 3.6 percent (413.9 million manat) - non-bank credit organizations.

Thirty banks, including two state-owned banks and over 120 non-banking credit organizations, are operating in Azerbaijan.

Lending to the Azerbaijani districts decreased by almost 15 percent up to 2.002 billion manat in February 2018 compared to February 2017.

The share of districts in the total loan portfolio of banks for the reporting period reached 17.32 percent.

According to the CBA, the loans worth 9.558 billion manat were issued in Baku in late February 2018 that is by 4.8 times more than in the districts. Almost 5.402 billion manat (56.52 percent of the total lending volume in Baku) accounted for the loans in national currency in Baku, while 1.60 billion manat (80.13 percent of the total lending volume of districts) - accounted for the loans in national currency in districts.

The average annual interest rate on loans in the country's districts in February 2018 was 18.34 percent, while 10.5 percent in Baku.

In February 2018, lending volume declined in all economic districts of Azerbaijan compared to February 2017, with the exception of the Upper Karabakh economic district.

Mortgage lending

The banks issued loans worth 19.2 million manat through the Azerbaijan Mortgage and Credit Guarantee Fund in February 2018 which is 31.5 percent more than in January 2018 and by almost 30 percent more than in February 2017.

In the reporting period, the Fund received 50 million manat from the state budget. For comparison, 50 million manat was transferred to the Fund from the state budget in 2017.

In February the total amount of refinancing the loans issued by banks earlier amounted to 22.5 million manat.

The average monthly amount of the loan delivered by the Azerbaijan Mortgage and Credit Guarantee Fund's authorized banks was 45,700 manat in February 2018 (41,651.8 manat in February 2017). The average period of the loan issuance is 281 months (280 months a year earlier). The average annual interest rate is 6.63 percent (6.67 percent a year earlier). The average monthly amount for payments is 325.9 manat (299.4 manat a year earlier).

In general, AMF's authorized lending institutions have issued 22,032 mortgage loans worth 998.55 million manat since 2006 and up till now.

According to the new mortgage loan issuance order, approved in June 2016, an ordinary mortgage loan will be issued only to Azerbaijani citizens and only in the national currency for a term from 3 years to 25 years, while preferential mortgage - up to 30 years to purchase a house, owned by the citizen. Interest rates on conventional mortgage must not exceed eight percent, while 4 percent per annum in preferential mortgage loan.

The maximum amount of the mortgage loan (including preferential) is determined by Azerbaijan Mortgage Fund JSC and must not exceed the cost of repaired housing with an average of 100 square meters in zone #7 in Baku. Annual interest rates on the loan are determined by the company's Supervisory Board.

The amount of preferential mortgage loan must be 85 percent of the cost of purchased housing by the date of the loan issuance, except for cases when a borrower appeals to decrease the loan amount. The amount of conventional mortgage loan must not be less than 75 percent and more than 85 percent of the cost of purchased housing by the moment of the loan issuance, except for the cases when a borrower appeals to decrease the loan amount.

The monthly payment for a mortgage loan must not exceed 70 percent of a debtor's monthly income. The age of the borrower must not exceed the retirement age according to the legislation. An agreement on life insurance is required.

The family members of war victims, national heroes, internally displaced people, civil servants with at least a three years' experience, teachers of secondary schools with at least a five-year service term, PhDs, doctors of science and those having special merits in sport as well as the military with at least a three-year service term can use the preferential conditions. Each family having the right to such a mortgage loan can use it only once.

Around 24 out of 30 banks in the country, as well as 17 insurance companies [in total 21] and 14 appraisal organizations are the authorized banks of the Azerbaijan Mortgage and Credit Guarantee Fund.

Azerbaijan's banking sector

The volume of deposits of legal entities and individuals in Azerbaijani banks totaled 20.68 billion manat in February 2018, which is 0.42 percent more than Jan.1, 2018, according to a report of the country's Central Bank.

The deposit base decreased by 4.94 percent compared to February 2017.

Deposits in national currency amounted to 5.83 billion manat (28.18 percent of all deposits), and foreign currency - 14.86 billion manat (71.82 percent).

Deposits of individuals amounted to 7.497 billion manat (an increase of 3.2 percent per year) in the period, the majority of which are deposits in foreign currency - 66.26 percent or 4.967 billion manat.

Total volume of deposits of legal entities in Azerbaijani banks amounted to 7.75 billion manat (showing an increase of 8.37 percent compared to February 2017), most of which are deposits in foreign currency - 62.13 percent, or 4.82 billion manat.

The total volume of deposits of legal entities in Azerbaijani banks amounted to 12.93 billion manat.

In February 2018, the volume of deposits of financial organizations of Azerbaijan amounted to 1.869 billion manat as compared to 5.332 billion manat in the same period of 2017. Deposits of non-financial organizations totaled 11.07 billion manat as compared to 9.33 billion manat in February 2017.

As of late February 2018, population's bank deposits in Azerbaijani districts totaled 607 million manat, which is 16.74 percent of all bank deposits, according to a report of the Central Bank of Azerbaijan (CBA).

The share of Azerbaijani districts made up 7.83 percent in the total volume of all bank deposits in the country in late February 2018.

Almost 74 percent (447.21 million manat) of all deposits in the country's districts account for savings in the national currency. In February 2017, this figure was more than 50 percent (274.40 million manat).

In early February 2018 in Baku, the volume of deposits amounted to 7.14 billion manat, including 2.49 billion manat in national currency.

In February 2018, the average annual interest rate on loans was 5.6 percent in the country and 4.3 percent in Baku.

Bank deposits in Azerbaijani districts:

Financial activity of banks

Capitalization of Azerbaijan's banking sector is reaching four billion manat, according to a report of Azerbaijan's Financial Market Supervisory Authority (FIMSA).

At the end of February 2018, this figure amounted to 3,885.2 million manat, an increase by 4.8 percent since early 2018.

The level of capitalization increased by 46.8 percent for the year [compared to February 2017]. The last time such high levels of capitalization of the sector were recorded in 2015.

In the last years, the country's banks have faced a difficult situation, namely, outflow of deposits, increasing dollarization, decreasing lending, and increasing losses. Amid these factors, the capitalization of banks sharply decreased, which eventually led to the closure of 15 of 45 banks. However, in 2017 the situation was gradually improving. The banks began to restore capitalization.

At the end of 2016, the capitalization was 1,908.8 million manat, while at the end of March 2017, this figure reached 2,760.2 million manat.

The sharpest increase in capitalization was recorded in November-December 2017 when capitalization rose by 570.1 million manat for the month, from 3,138.9 million manat to 3,709.2 million manat.

The profit of the Azerbaijani banking sector amounted to 141.3 million manat at the end of February 2018, according to the FIMSA report.

The Azerbaijani banking sector continues to restore its profitability. Thus, the profitability of banks increased by 2.8 times in February 2018 compared to February 2017. In 2017, the total profit of banks amounted to 883.6 million manat.

The income of banks for the reporting period amounted to 357.7 million manat (interest - 287 million manat, non-interest -70.7 million manat), while expenses - 244 million manat (interest-101.1 million manat, non-interest - 142.9 million manat).

The banks received 30.8 million manat through the return of money previously directed to create reserves to cover possible losses during the issuance of loans. Other income of banks amounted to one million manat.

As of February, banks paid 4.2 million manat as profit tax.

The assets of the Azerbaijani banking sector increased by two percent up to 28,498.8 million manat at the end of February 2018.

The volume of the loans issued by the banks declined by almost 1.7 percent up to 11,147.2 million manat. To cover possible losses on loans, banks created reserves worth 1,469.9 million manat.

During the reporting period, the banks' investments in securities amounted to 2,471.6 million manat, which is 1.1 percent less than in early 2018.

The remaining major assets of the banks were distributed among deposits placed in other financial institutions - 7,814.4 million manat (an increase of 8 percent), nostro accounts (correspondent accounts in other banks) - 1,781.5 million manat (a decrease of 32.2 percent), correspondent accounts in the Central Bank - 2,739.9 million manat (an increase of 34.8 percent).

The banks' liabilities increased by almost 1.7 percent up to 24,613.6 million manat at the end of February. An increase in liabilities is mainly connected with an increase in the volume of deposits - by 1.45 percent up to 17,140.3 million manat. At the same time, legal entities' deposits increased by 0.5 percent up to 9,403.1 million manat and individuals' deposits - by 2.58 percent up to 7,737.2 million manat).

The banks reduced the liabilities to the Central Bank by almost two percent up to 497.5 million manat.

Thirty banks, including two state-owned ones, operate in Azerbaijan.

Payment card market

The turnover of payment card transactions carried out via ATMs and POS-terminals amounted to 1.32 billion manat in Azerbaijan in February 2018, which is by 17.9 percent more than in February 2017, said the report of the Central Bank of Azerbaijan (CBA).

According to the report, the total number of payment card transactions reached 8.47 million in February 2018 (18.3 percent-growth compared to February 2017).

The number of debit card transactions [both inside and outside the country] reached 7.58 million totaling 1.16 billion manat during the reporting period. Meanwhile, 4.91 million debit card transactions worth 951 million manat were carried out via ATMs, and 654,000 transactions worth 98 million manat via POS-terminals.

Customers of banks carried out 889,000 transactions on credit cards [both inside and outside the country] in February 2018 for a total of 163 million manat (240,000 operations for 51 million manat - via ATMs inside the country, 223,000 transactions for 60 million manat - POS-terminals inside the country).

The number of payment cards rose by 8.5 percent to 5.89 million in February 2018 as compared to the same period of 2017.

Bulk of cards - about 5.22 million - is debit cards, including 2.52 million - social cards, 1.88 million - salary cards, and 0.81 million- others. The number of credit cards during the period hit 673,000.

As of March 1, 2018, 2,444 ATMs operated in the country, 1,318 of which are located in Baku and 1,126 - in other cities and districts of the country. The total number of ATMs has decreased by 19 or 0.8 percent for the year.

As of late February 2018, the number of POS-terminals amounted to 65,240 in the country, 36,839 of which are installed in Baku and 28,401 in other cities and districts of the country.

The number of POS-terminals has decreased by 5,710 or 8 percent in Azerbaijan for the year.

Stock market

The total turnover of exchange transactions on all instruments at the Baku Stock Exchange reached 4.092 billion manat in January-February 2018, that is, by 2.8 times more than in January-February 2017.

The number of transactions increased by 68.9 percent up to 17,802 for the year.

The volume of derivatives market reached 1.896 billion manat or 46.3 percent of the stock exchange turnover (3.2 times more than in 2017).

During the reporting period, the volume of transactions on state securities increased by 12.1 times up to 1.959 billion manat, the volume of transactions on shares decreased by 94.8 percent to 0.031 billion manat, the volume of transactions on bonds increased by 55 percent up to 0.135 billion manat, REPO operations - by 35.5 times up to 0.071 billion manat.

Comparative table on the trades results in the state and corporate sectors at the Baku Stock Exchange: