FINANCIAL STABILITY REVIEW

Transcription

1 THE CENTRAL BANK OF THE REPUBLIC OF AZERBAIJAN FINANCIAL STABILITY REVIEW 213 and Quarter I, 214 Baku 214

2 ACRONYMS CBA the Central Bank of the Republic of Azerbaijan ADIF the Azerbaijan Deposit Insurance Fund AMF the Azerbaijan Mortgage Fund under the Central Bank of the Republic of Azerbaijan AZİPS the Large Value Payment System IMF the International Monetary Fund BCBS the Basel Committee on Banking Supervision SSC the State Statistics Committee of the Republic of Azerbaijan SCC the State Customs Committee of the Republic of Azerbaijan HHI the Herfindahl-Hirschman Index BCSS the Retail Payments Systems DGCs developing countries DDCs developed countries MF the Ministry of Finance of the Republic of Azerbaijan REER the Real Effective Exchange Rate ROA return on assets ROE return on equity GDP Gross Domestic Product ECB the European Central Bank FRS the Federal Reserve System 2

3 Table of Contents Executive Summary Overview of the banking system The global macroeconomic environment... 7 Box 1. How global risks may affect Azerbaijan Macroeconomic situation in Azerbaijan Development of the banking system in Azerbaijan Financial intermediation of the banking system Box 2. Macroprudential regulatory efforts of the CBA Banking system dynamics Dynamics and structure of attracted resources Assets of the banking system... 2 Box 3. Credit demand: Outlook of the lending market survey Profitability of the banking system Box 4. Profitability of the banking system in Azerbaijan international comparison Capitalization of the banking system Credit risk Liquidity risk Box 5. The liquidity position of the Azerbaijani banking system under stress: simulation of the implementation of the Basel III Accord Payment systems Charts and tables Chart 1. Business activity index (deviation from 5)... 8 Chart 2. Risk map... 1 Chart 3. GDP growth (y.o.y. in %)

4 Chart 4. Growth of the non-oil sector, % Chart 5. Output gap on the non-oil sector, % Chart 6. Consumption demand (annual change, %) Chart 7. FX reserves of the CBA Chart 8. Macro indicators of the banking system Chart 9. Savings of the population Chart 1. Individuals borrowing from banks Chart 11. Herfindahl-Hirschman index Chart 12. Structure of liabilities Chart 13. Foreign debt Chart 14. Structure of assets... 2 Chart 15. Credit portfolio... 2 Chart 16. Loan/GDP, % Chart 17. Currency structure of credit portfolio Chart 18. Sector structure of credit portfolio Chart 19. Lending activity, survey results Chart 2. Lending standards Chart 21. Profitability of the banking system Chart 22. Interest spread and net interest margin Chart 23. Growth components of banking system profit Chart 24. Efficiency of the banking system Chart 25. Cost of banking system intermediation Chart 26. ROA Chart 27. ROE Chart 28. Efficiency Chart 29. Capital adequacy Chart 3. Capital s growth structure Chart 31. Quality of capital... 3 Chart 32. Capitalization and assets dynamics... 3 Chart 33. International comparison on capital adequacy Chart 34. Quality of credit portfolio Chart 35. Share of overdue loans in total credit portfolio Chart 36. Structure of consumer loans Chart 37. Factors affecting the banking sector liquidity Chart 38. Structure of liquid assets Chart 39. Maturity gap of assets and liabilities, (as a percentage of assets) Chart 4. Amount of payment orders processed (AZN million)

5 Table 1. Economic growth... 7 Table 2. Deficit of the current account of the balance of payments and state budget, % of GDP... 9 Table 3. GDP growth rate projection in Azerbaijan Table 4. Grouping of banks on ROA Table 5. Grouping of banks on capital adequacy Table 6. Liquidity indicators

6 Executive Summary Financial stability risks are being transformed globally. Risks in DDCs are decreasing, while DGCs face new risks. This is mainly related to gradual halt of the long-term accommodative monetary policy implemented by the Federal Reserve System (FRS). DGCs are facing new tougher conditions while attracting financial resources, as well as higher service fees on existing debts. The environment, the Azerbaijani banking system is operating in, is marked by the economic activity, and maintenance of price and macroeconomic stability. GDP growth mainly stems from the non-oil sector activity. The key contributors to economic growth were the budget activity and lending backed internal demand. The total consumer activity was backed by a favorable condition in the labor market, broad use of bank lending etc. The high economic activity is expected to linger (the IMF, the World Bank). The banking system kept developing, banks enhanced their roles in the economy, and risks remained in an acceptable range. The size of the banking sector s credit portfolio and the range of bank products and services are increasing regularly. Access and use of banking services are comparable with that of a number of DGCs. Notwithstanding the total growth of the credit portfolio over the period, banks succeeded in maintaining an acceptable level of the credit risk. The financial sustainability of the banking system is satisfactory. Banks increased their profit, accompanied by positive tendencies in their profitability indicators. The factor analysis of banking system profitability displays that the main contributor of the increase in aggregate profit was interest income. The banking system capitalization strengthened in response to the risk profile. The minimum capital requirement set by the CBA triggered the growth rate of capital. The CBA continued with efforts to protect confidence in the banking system, minimize risks and boost management capacity, and elevate sector s sustainability. To preventively avoid accumulation of the risk of overheating in the banking services market the CBA took a number of cooling measures, communicated with banks on existing and potential risks and toughened banks supervision. Assets classification has been improved with an eye to apply a macroprudential approach to credit risk regulation and approximate to the IFRS. The newly created regulatory frame allows to consider time and quality criteria, apply differential provisioning, as well as take into account the quality of collateral in provisioning. 6

7 1. Overview of the banking system 1.1. The global macroeconomic environment Global economic activity and growth tendencies are reversing. While the economic activity is high and financial risks are prone to decrease in DDGs (particularly in the USA), DGCs experiencing reverse tendencies. Gradual halt of stimulating monetary policy of leading central banks makes financial tools of those countries more attractive and interest rates higher. Thereupon, DGCs are facing new tougher conditions while attracting financial resources, as well as higher service fees on existing debts. Global economic growth has increased to 3.7% in the second half of 213 (2.6% in the first half). The IMF predicts that the economic activity will increase 3.6% in 214 and 3.9% in 215 (the World Economic Outlook (WEO), April 214). Given recent tendencies in the global economy, the IMF left economic growth predictions on 214 for DDCs unchanged, while it revised down DGCs expectations (Table 1). Table 1. Economic growth Projections (WEO - April 214) Difference from January 214 WEO Update World economy Developed countries USA Euro zone Japan Developing countries Emerging and Developing Europe CIS Emerging and Developing Asia Latin America and the Caribbean Source: IMF, the World Economic Outlook (WEO) April 214. Global economic growth was driven by the US economy. In the second half of 213 the USA economy exceeded expectations and grew 3.3%. Economic growth in the USA is predicted to be approximately 2.9% in , which is higher than a longrun trend. Recovery of the US economy allowed the Federal Reserve System (FRS) to halt a long-run accommodative monetary policy. 7

8 1/1/212 1/3/212 1/5/212 1/7/212 1/9/212 1/11/212 1/1/213 1/3/213 1/5/213 1/7/213 1/9/213 1/11/213 1/1/214 The economy of the euro zone remains uncertain: GDP grew very slightly in the 3 rd quarter of 213 (the first growth of the economy since 211). Overall, the GDP growth rate was.5% in 213 (.7% in 212). According to predictions, the euro zone economy will keep growing in 214 and the GDP growth rate will equal 1.2%. However, very low inflation does not support acceleration of the economic activity. Higher internal demand and net export support revival. However, high unemployment and indebtedness, weak investments, output gap, tough lending terms and financial fragmentation will restrain growth. On this backdrop, the supportive monetary policy, completed reforms in the financial sector and structural reforms are important. Hence, the ECB s stimulating measures in 214 was critical. Over the year the ECB double reduced the refinancing rate (currently the refinancing rate of the ECB is.15%, which is a historical minimum). The growth rate of the economy accelerated in Asia (except for Japan) in the 2 nd half of 213, due to recovery of export and active internal demand in DDCs (particularly in the USA and euro zone countries). Major countries across the region posted high retail trade. Despite high private consumption and public expenditures, the growth rate of the Japanese economy diminished in the 2 nd half of 213, as a result of a disproportionate balance between export and import. To contribute to the economic activity and eliminate risks of deflation, the Bank of Japan adopted a set of stimulating measures and set a 2% inflation target. Endogenous risks are being accumulated in China particularly concerning risks related to credit expansion. Chart 1. Business activity index (deviation from 5) 5 The above factors caused Global DDCs DGCs improvement of conjuncture indicators of retail and corporate sector, as well as high business activity and consumer demand in DDCs in 213. The business activity index increased considerably in these countries by the year-end of 213, highest since 211 (Chart Source: IMF 1). From the beginning of 214 upward trend on expectations 8

9 has been reversed. DDCs still face budget debt risks. The US net sovereign debt made 81.3% of GDP (5.4% in 28), and in the euro zone 72.4% of GDP (54.1% in 28) 1. High unemployment (particularly among youth) is still a critical problem. Whereas unemployment is declining in the USA, it mainly stems from the declining share of the economically active population. New jobs are being created at a slow pace. DGCs benefited from favorable foreign financing and high credit growth. However, high interest rate expectations in DDCs, particularly in the USA, as well as changes in global investors risk appetite led to low capital flows to DGCs and capital withdrawals. Internally accumulated imbalances in most countries intensify amid such deterioration. Turkey, the SAR, India and Brazil are challenged by high deficit on the current account of the balance of payments and the state budget (Table 2). Table 2. Deficit of the current account of the balance of payments and state budget, % of GDP Country Indicator Brazil India SAR Turkey State budget Current account State budget Current account State budget Current account State budget Current account Source: IMF, Fiscal monitor April, (forecast) 215 (forecast) Officials took appropriate policy decisions to maintain a macroeconomic balance and financial stability in major cases. These decisions include enhancement of internal investors base, expansion of bank intermediation and capital markets, boost of the quality of institutions. Although DGCs have been affected by recent processes in the global economy differently, they overall shared the following challenges: high debt burden of private and public sectors; 1 Maastricht criteria imply that the state budget should not exceed 6% of GDP. 9

10 mass revaluation of global investors risk appetite; incremental trends of declining risk appetite; threat of capital outflow and likelihood of liquidity constraints; high cost of indebtedness and fiscal sustainability pressures for DGCs as a result of changes in market conjuncture. Chart 2. Risk map Macroeco nomic risk Monetary and financial environm ent Source: IMF Thus, global financial stability risks are still under transformation (Chart 2.). Risks in DDCs decline, while DGCs are exposed to new risks, due to gradual halt of longterm accommodative monetary policy implemented by the USA. The halt of accommodative monetary policy in the USA may lead to a tougher global monetary and financial condition (high interest rates, shrunk liquidity etc), which may be seen as a potential source of risk for DGCs, although macroeconomic risks remained unaltered when compared to October 213. Continuous capitalization of banks in the euro zone has led to a more robust banking system, resulting in reduction of credit risk. Low volatility in global financial markets, high access of banks and the corporate sector to financial resources underpinned stability of liquidity and market risks, as well as the risk appetite of global investors. Risk of DGCs Risk appetite Credit risk Market and liquidity risks April 214 GFSR Box 1. How global risks may affect Azerbaijan October 213 GFSR Due to the fact that external and fiscal sectors have positive surplus, the need of Azerbaijan for external financing is considerably low (by international standards). The sovereign debt of the Republic of Azerbaijan in 213 amounted to AZN million, while the sovereign debt-to-gdp ratio was 8.2% (compared to AZN million. and 8.3% respectively in 212). The corporate sector is mainly financed by internal funds, exposure of foreign banks to the Azerbaijani banking sector is low (the share of the banking system s foreign debt in GDP is 2%). From this standpoint the assumed interest rate rise in global financial markets is predicted to have no impact on the Azerbaijani banking system. Source: RCD REO Annex 2, 213, International Linkages and Spillovers to Azerbaijan 1

11 3/31/213 6/3/213 9/3/213 12/31/213 3/31/ Macroeconomic situation in Azerbaijan The macroeconomic environment of the country, which affects performance of the banking system considerably, is characterized by the economic activity, and maintenance of price and macroeconomic stability. Chart 3. GDP growth (y.o.y. in %) Real GDP increased by 5.8% in 213 and totaled AZN 57.7 billion (Chart 3). Over the first quarter of the current year GDP rose 2.5% in real terms and equaled AZN 13.2 billion. GDP growth mainly stemmed from the activity of the non-oil sector. Thus, the share of the non-oil sector in GDP was 56.6%, which contributed 5.3 p.p. to total economic growth. The shares of the manufacturing and service sectors in the value added were 2/3 and 1/3, respectively. Chart 4. Growth of the non-oil sector, % Source: SSC Source: SSC GDP growth Oil and gas sector Non oil and gas sector non-oil industry construction tourism 213 1st quarter Information and communications trade and vehicls repairment transport and warehousing agriculture, forestry and fishery non-oil GDP growth, right-hand axis All segments of the non-oil sector posted growth over the period (Chart 4). The highest growth rate among the segments was in construction, hotels and restaurants and catering, communication and trade. Roughly half of the 1% annual growth in the non-oil economy, or 4.8 p.p., stemmed from construction. The main contributors of the growth of non-oil industry were food industry, machinery, construction materials production, leather production and furniture industry. The high 214 1st quarter 11

12 growth rate in agriculture owes to both crop and livestock sectors. Among services the highest growth was observed in catering and trade. In total, excluding the oil sector, the trade sector grew by 4.6%, the non-trade sector by 11.2%. According to CBA calculations, in the environment of high internal demand the output gap 2 on the non-oil sector positively zoned in 213 (Chart 5). Chart 5. Output gap on the non-oil sector, % forecast The output gap on the non-oil sector for 214 is forecasted to remain in a positive zone, totaling.5%. This means full use of the existing resources (manufacturing, human resources, etc.) without causing extra inflationary pressures in the country. According to the SSC, 95% of the economically active population of the country was engaged in various segments of the economy and the social sector in 213. Average annual inflation was 2.4% in 213 and is likely to remain at a single digit level in upcoming years. Total investments to the economy in 213 increased by 15.1% and totaled AZN 17.9 billion, equaling 31% of GDP. In comparison, investments to the economy in 212 made up 28% of GDP, despite a 2% increase. Investments to the non-oil sector increased by 12.1%. The share of investments to the non-oil sector in total investments was 73%. When it comes to financial sources of investments, 76.7% of funds channeled to capital investments stemmed from domestic sources, 23.3% from foreign sources. Internal demand, supported by the budget activeness and lending channel was among the key sources of GDP growth. Household consumption had a considerable share in the structure of GDP. Favorable conditions in the labor market, increased consumer loans, etc. supported overall consumer activity. 2 Output gap difference between real (e.g. GDP) and potential production in the economy: Output gap = 12

13 Consumption expenditures increased 14.2% in 213 (9.3% in 212). High consumption expenditures contributed to growth in retail trade turnover and continuation of growth in the trade sector (Chart 6). An increase in salaries and social transfers of the government had a significant role in growth of income of the population (8.4% in 213). Disposable income of the population rose 8%, totaling AZN 34.5 billion over the period. Chart 6. Consumption demand (annual change, %) Source: SSC The CBA has been conducting a quarterly conjuncture surveys between households on Financial behavior, intentions, and inflation expectations of households since 213. According to survey results, the Consumer Confidence Index in the country is positive. Results of the financial behavior and intentions survey conducted among households demonstrate an optimistic outlook for middle-term expectations and a positive consumer behavior. Note that the survey involved respondents across the country who were classified in terms of income level, occupation, work regime, education, age and gender. 213 Nominal income of population Retail trade turnover Paid Services Positive net foreign trade surplus contributed to GDP growth. Thus, according to the SCC, in 213 the foreign trade turnover reached USD 34.7 billion, USD 24 billion of which falls to the share of exports and USD 1.7 billion to imports. As of the end of 213 foreign trade balance was positive, exports exceeded imports more than twice st quarter 214 1st quarter 13

14 Chart 7. FX reserves of the CBA FX reserves, billion US $ FX reserves/non-oil import of next year, month 214 forecast The CBA s FX reserves increased by 21% over the year and surpassed USD 14 billion, sufficient for one year import of goods and services (Chart 7). High economic performance is predicted (IMF, World Bank forecasts) to continue in the country (Table 3). Table 3. GDP growth rate projection in Azerbaijan Name of the institution IMF WB ADB Source: IMF, WB, ADB 14

15 2. Development of the banking system in Azerbaijan 2.1. Financial intermediation of the banking system In 213 the banking system was prone to growth, and positive dynamics of macro indicators characterizing the role of banks in the economy continued. Assets of the banking system rose AZN million (23%) in 213 and reached AZN million as of the year-end. This tendency continued in the current year as well; bank assets increased AZN 1 34 million (5.1%) over the first quarter and equaled AZN million as of Chart 8. Macro indicators of the banking system 9% 75% 68% 74% 72% 63% 63% 68% 6% 45% 3% 15% % -15% 12/31/28 12/31/29 12/31/21 12/31/211 The assets to non-oil GDP ratio grew 5 p.p. over the year and totaled 68% (Chart 8). Longterm dynamics of assets shows that the rapid growth phase of the banking system was replaced with more moderate growth. Thus, while the gap between the real growth rate of assets and the non-oil GDP growth rate was 15 p.p. in 28, it shifted down to 1.8 p.p. in 213. The non-oil GDP growth rate exceeded real growth of assets 5.8 p.p. over the first quarter of the current year. As a result of the CBA s relevant measures, the growth rate of the banking system harmonized with that of the economy, and bank expansion stabilized. Thus, to preventively avoid overheating and accumulation of risks in the banking services market the CBA took a number of cooling measures, communicated with banks on 6.% 5.% 4.% 3.% 2.% 1.%.% -1.% existing and potential risks and toughened banks supervision. 12/31/212 Assets/Non-oil GDP, left hand axis Non-oil GDP growth Assets growth (real) Assets growth (nominal) 12/31/213 Box 2. Macroprudential regulatory efforts of the CBA The CBA has always focused on increasing sustainability of the banking system, strengthening risk management potential and preventing systemic risk accumulation. Asset classification requirements were improved in order to apply a macroprudential approach to credit risk regulation and harmonize it with advanced regulatory standards. A regulatory framework enabling to take into account time and quality criteria, apply differential 15

16 provisioning, and consider the quality of collateral in the process of provisioning was developed. The new version of the Regulations on assets classification and loan loss provisioning cover the above mentioned issues. Provisioning norms on some asset categories were reduced to apply the differential approach on regulation of the credit risk depending on the type and quality of assets. Provisioning rates on standard assets were reduced by half (the new norm for satisfactory assets - 1%, for assets under control 5%). Besides the new provisioning policy described above, the CBA implemented preventive policy reforms against potential risks which are likely to arise in the future. The main target was consumer loans; criteria for classification of these types of assets were tightened in order to have laminar portfolio growth. Reforms were aimed at handling management process of consumer loans portfolio risk more effectively and encouraging banks to develop a sound credit portfolio. Intensification of the supervisory regime on the consumer loans portfolio enabled a risk diagnosis. Necessary measures were taken to regulate existing risks in the consumer loans segment in a preventive regime, taking into account findings of this diagnosis. An acceptable growth capacity and risk prospects were identified and necessary strategic recommendations given to banks. To further strengthen financial sustainability of the banking sector, lending supervision over banks was intensified in line with responsible lending principles. At the same time, in order to protect financial consumer rights and enhance financial literacy of the population the requirement on calculating and publicly disclosing Effective Annual Percentage Rate has been applied since early 213 which reflects all relevant expenses on banks loan products and enables to express additional costs applied to borrowers as a single aggregate indicator. Application of the Effective Annual Percentage Rate enabled customers to make a competitive choice between banks offering banking products and services. Besides the policy reforms discussed, the CBA made relevant changes to the normative base regulating credit risks on a single borrower or a group of related borrowers, and sectoral concentration so as to measure more accurately and aggregate concentration risks, and ensure supervision over them. The fundamental change made to the normative base is related to the base of set limits. Given the role of Tier I capital as a buffer against expected and unexpected losses and as a guarantor of sustainability of a bank in case of risks, the aggregate capital included in the calculation as a base/denominator of set limits on concentration risk was replaced with Tier I capital. This approach is also reflected in the consultative document of the Basel Committee Supervisory framework for measuring and controlling large exposures. 16

17 Chart 9. Savings of the population 7,. 6,. 5,. 4,. 3,. 2,. 1,.. rising to 274 by the end of 213. The population used various banking services more frequently. Thus, deposits of the population kept growing; the deposits to non-oil GDP reached 2.6% (Chart 9). The scale of loans to the population, range of loan products and the number of borrowers grew regularly. 148 out of 1 adults had a credit accounts in banks in 212, while International comparison shows that the level of use of banking services by the population is at a satisfactory level in Azerbaijan (Chart 1). Chart 1. Individuals borrowing from banks Source: IMF 12.8% 1, /12/ % 2, /12/ % 2, /12/21 4,29.7 The CBA takes supervisory measures to strengthen the system of protection of banking services customers interests in order to expand use of banking services, and increase the confidence of the population and corporate sector in banks. The CBA continued a series of events on financial awareness together with commercial banks, international organizations and public entities. The ADIF reduced the interest rate ceiling on insured deposits in order to decrease depositors excess risk appetite, as well as the cost of banking products. 19.2% 19.8% 31/12/211 Population`s savings, mio. man. 5, /12/212 Population`s savings/non-oil GDP, % 2.6% 6, /12/ Turkey Hungary Estonia Georgia Malaysia Portugal Brazil Latvia Chile Macedonia Azerbaijan China Bulgaria Bosnia & Thailand Venezuela Mexico Romania Montenegro Serbia Colombia Dominica Poland Concentration in the banking system tended to decrease. The share of top five banks in terms of asset size decreased 1.6 p.p. and comprised 55% of total assets of the banking system in 213 (55.1% as of ). A similar trend can be observed in the 25% 2% 15% 1% 5% % 3 Per hundred adult population. 17

18 the credit market: the share of credit portfolios of top five banks in terms of credit volume in total loans decreased 1 p.p. compared to 29 4 and totaled 56%. The share of top five banks in terms of capital size in aggregate capital of the system decreased 2.4 p.p. in 213 and totaled 47.6%. Currently, capital of 24 banks, which together account for 85% of assets of the banking system, is above AZN 5 million threshold 5. The HHI, widely used internationally to assess concentration, demonstrates low level of concentration in the banking system. One of the reasons is a large number of small and medium-sized banks. Chart 11. Herfindahl-Hirschman index 3 With respect to deposits With respect to assets 25 With respect to loans remained below 15 over the first quarter of the current year as well. As shown in Chart 11 the index decreased between 27 and 213. In terms of the share in assets, loans and deposits of the banking system, HHI is below 15 and reflects a lowconcentrated market 6. Thus, the share of the HHI in assets, loans and aggregate deposits was 1426, 1482 and 118 respectively as of the end-213. The HHI 4 29 is the historical peak of concentration in the bank loans market. 5 According to the CBA s Regulations On calculation of bank capital and its adequacy minimum aggregate capital of a bank should not be below AZN 5 (fifty) million from 1 January According to the U.S. Department of Justice markets fall into 3 parts: low-concnetrated (HHI<15), medium-concnetrated (15<HHI<25) and high-concnetrated markets (25<HHI). The value of the HHI may vary between -1 interval. 18

19 2.2. Banking system dynamics Dynamics and structure of attracted resources In 213 banks liabilities increased by 22% (AZN 321 million), for a total of AZN million as of the end-period. Banks resources attracted from non-financial corporate customers and population rose 16% and equaled AZN million, which account for 52% of total liabilities (Chart 12). Chart 12. Structure of liabilities 1% 8% 6% 4% 2% % 28 Deposits of the population rose 22% and reached AZN 6 billion over the last year; their share in banks liabilities made 3% as of the end-period. Along with growth in loan volume, their structure also displayed positive trends. National currency denominated deposits tended to grow more rapidly than foreign currency denominated deposits. In 213, national currency denominated deposits rose 31.2% and accounted for 61% of total deposits (foreign currency denominated deposits rose 16.7%). Term deposits and demand deposits increased AZN million (3.4%) and AZN 45 million (4.4%), respectively. Chart 13. Foreign debt Foreign debt I rüb Equity Other liabilities Due to CBA Loans and deposits attracted from financial sektor Corporate deposits Retail deposits Q 1 Foreign debt/assets The tendency continued over the first quarter of the current year as well. National currency denominated deposits rose 5%, while foreign currency denominated deposits increased less than 3%. The scale of deposits placed by non-residents jumped 32% in 213, which accounts for 12% of total deposits. While foreign capital outflows to other DGCs declined, funds attracted from non-resident banks and international financial organizations by banks of Azerbaijan 19

20 I quarter increased and reached AZN million (such funds rose about 12% over the first quarter of the current year and was AZN million as of ). Foreign debt accounts for 17.2% of assets of the banking system (Chart 13) Assets of the banking system Growth in the structure of assets of the banking system primarily sourced from the credit portfolio. Chart 14. Structure of assets 1% 8% 6% 4% 2% % 8% 8% 8% 9% 9% 8% 8% 8% 7% 8% 9% 1% 8% 9% 66% 68% 65% 63% 65% 7% 68% 14% 11% 15% 15% 13% 1% 1% I quarter Liquid assets Due from financial sector Loans Investments Other assets Credit investments were AZN million at the end of the period, having increased by 25.3%. The share of loans of the banking system in assets was 7% as of (Chart 14). The share of loans in assets increased amid decline in high quality liquid assets and investments. As a result of the CBA s preventive measures, the portfolio growth rate slowed down. Thus, over the 1 st quarter, 214 the loan portfolio rose 3.4% (the size of the loan portfolio was AZN million as of ) and its share in total assets declined to 68%. Chart 15. Credit portfolio Loan portfolio (mio.man.) Net increase in loan portfolio (quarterly) (mio.man.) Loan portfolio growth rate (annual), right hand scale 1% 8% 6% 4% 2% % -2% In 213, the credit portfolio increased by AZN million (AZN million in 212, AZN million in the 1 st quarter, 214) (Chart 15). Credit growth sourced primarily from systemically important banks. Thus, small banks made only a 1.4 p.p. contribution to the overall 5.5% growth of the credit portfolio in

21 Chart 16. Loan/GDP, % The loans to non-oil GDP ratio is at a satisfactory level in Azerbaijan compared to other DGCs (Chart 16). Moderate growth of the loans-to-non-oil GDP ratio in Azerbaijan reflects low volatility in lending and the adequacy of credit growth to demands of the economy. Source: IMF and CBA *Loan/non-oil GDP Chart 17. Currency structure of credit portfolio from 42% to 28% between 29 and I quarter Loan in national currency (mio.man) FX loans (mio.man) Average annual AZN/USD exchange rate (right hand axis) Loans in national currency/total loans (right hand axis) 9% 8% 7% 6% 5% 4% Amid the stable exchange rate of manat against foreign currencies and growth of lending in manat the share of national currency denominated loans in the structure of the credit portfolio kept growing (Chart 17). Consequently, the share of foreign currency denominated loans in the total portfolio fell 21

22 Chart 18. Sector structure of credit portfolio 1. Households Trade and services Construction and property Industry and production Others Agriculture and manufacture Transport and communication Energetics, chemica ls and natural resources The sector structure of the credit portfolio did not change considerably during 213 (Chart 18). The share of loans to households in the total credit portfolio remains high. Furthermore, it should be noted that the sector structure of banks loans to legal entities is changing; banks are becoming more interested in lending to manufacturing sectors. Over the past five years the share of loans to trade and service sectors declined and as of the end of 213 fell to 14.4% from 21.8%, while the share of loans to construction, property, industry and manufacturing sectors increased. According to CBA s surveys among banks, economic entities demand for bank loans is likely to remain high in the future (Box 3). Moreover, along with traditional factors (business cycle, seasonal, etc.) tightening of the CBA s prudential requirements (both requirements on loan underwriting, and norm requirements) will affect the dynamics and structure of the credit portfolio in the current and following years. Box 3. Credit demand: Outlook of the lending market survey 7 Demand for business loans has overall increased. According to information from banks, growth was primarily seen in small and medium enterprises segment. The corporate sectors demand for lending arises from the goal to finance business and working capital. Gradual reduction of loan interest rates by banks provides additional support for corporate sector s demand for lending (Chart 19). The CBA s ongoing supervisory measures to strengthen risk management capacity in banks has led to a decreased risk tolerance, provided a long-term risk-income balance, and tightened non-financial requirements for borrowers during loan underwriting (Chart 2). 7 Conducted quarterly among banks (calculations were conducted on the share of the portfolio of each bank). 22

23 Chart 19. Lending activity, survey results* 6% 5% 4% 3% 2% 1% % 212 IV 213 I 213 II 213 III 213 IV Demand on corporate loans Supply of corporate loasn Chart 2. Lending standards 22% 17% 12% 7% 2% -3% -8% 212 IV 213 I 213 II 213 III 213 IV Corporate loans Retail loans Nevertheless, increased competition between banks to attract sound customers will ultimately enhance performance of non-bank credit institutions in the market, and encourage banks to offer new banking products and soften lending conditions (interest and non-interest payments). *) Survey findings were assessed through the balance method : the balance method is the difference between the share of respondents, who chose an increase ( softening ) answer to the question, in the number of total respondents and the share of respondents, who chose a decrease ( tightening ) answer. A positive index reflects an increase in demand/supply for lending and softening of requirements for borrowers. A negative index, on the contrary, reflects a decrease in demand/supply for lending and tightening of requirements for borrowers. 2.3 Profitability of the banking system Net profit of the banking system (after declared dividends) constituted AZN million (AZN 99.6 million as of ), roughly twice as much relative to the previous year. The number of profitable banks and their share in the banking system increased regularly over the last three years. Thus, the number of profitable banks rose from 3 to 39, with their share in the banking system increasing from 47% to 96%. Aggregate loss of banks operating with loss declined to a considerable extent and totaled only AZN 4.75 million (AZN million in 211, AZN 65.5 million in 212). 23

24 Chart 21. Profitability of the banking system Banks profitability indicators posted a positive trend as well. Hence, ROA equaled 1.5%, having increased.7 p.p, and ROE was 11.7% with a 4.7 p.p. increase (Chart 21). This could primarily be attributed to the ongoing active credit policy and quality improvement of bank assets. When it comes to bank groups, systemically important banks experienced significant recovery in the operating profitability. In 213 ROA reached 2.3%, having increased 1.6 p.p, and ROE was 18.9%, having increased 13.2 p.p. Profitability indicators of other banks displayed moderate growth: ROA rose by.2 p.p. and equaled 1.4%; ROE rose by.4 p.p. and equaled 5.7%. Relatively slow growth of non-systemically important banks is due to minor size of assets, high operation costs, and delays in implementing innovative tools. Estimates suggest that changes in assets classification and provisioning requirements by the CBA will not have a significant impact on profitability of the banking system. Thus, according to preliminary estimates profitability of assets will not fall below the critical level (the level widely used internationally 1.5%) during 214. A positive migration occurred in banks classification according to the ROA level. Thus, the number of banks with a ROA indicator higher than.5% shifted from 24 to 3, and their share in assets of the banking system rose from 81% to 89% (Table 4). Table 4. Grouping of banks on ROA Number of Share in assets of the Number of Share in assets of the ROA banks system banks system Below.5% % %.5% - 1.% 4 4.6% % 1.% - 1.5% % 8 14.% 1.5% - 2.% % 4 5.8% 2.% - 2.5% 2 1.2% 5 12.% Above 2.5% % % Net profit, mio. man. (left hand axis) ROA, % ROE, %

25 Amid the increase of competition in the lending market and the decrease of the CBA refinancing rate, banks increased their efforts to use available resources more effectively. Chart 22. Interest spread and net interest margin 16% 14.6% 14% 12.6% 12% 1.7% 1.5% 1.2% 1.7% 1% 8.% 8% 7.2% 6.8% 6.9% 6.9% 7.% 8.4% 6% 6.6% 6.9% 4% 5.4% 5.7% 5.5% 5.9% 5.3% 2% 3.9% 3.6% 3.4% 3.7% % Return on interest-bearing assets Cost of funding Interest rate spread Net interest margin twice as much. While cost of funding increased by.1 p.p., return on assets rose by.5 p.p. (Chart 22). As a result, growth in net interest margin 8 (.6 p.p. over the year), which characterizes the effectiveness of assets and liabilities management, exceeded growth in interest spread (.3 p.p. over the year) Chart 23. Growth components of banking system profit 4% 2% % -2% -4% Interest income Interest expences Non-interest income Non-interest expences Reserves Taxes Net profit Analysis of factors, contributing to change of profitability of the banking system shows that growth in aggregate profit primarily stemmed from interest income (Chart 23). Thus, the net interest income rose by 39% in 213 (in %). The growth of interest income and expenses affected dynamics of the net interest income. Due to increase in the credit portfolio, the growth rate of interest income (31% in 213) surpassed that of interest expenses (24% in 213) on attracted resources and the difference was 7 p.p. (1 p.p. in 212). 8 Interest margin = *1 25

26 Chart 24. Efficiency of the banking system Payroll expences/non-interest expences, % Cost to income, % Optimization of interest expenses was another significant factor affecting the increase in banks profitability. The number of full-time employees in the banking sector rose by 14% in 213, while salary related expenses increased by 24%. Banking infrastructure expanded overall, with the cost-to-income ratio 9 being 36.3%, having decreased 2.8 p.p. relative to 212 (as a result of the higher growth rate of income (29%) than salary expenses (24%)) (Chart 24). Chart 25. Cost of banking system intermediation 6% 5% 4% 3% 2% 1% % 5.% 52.3% 49.7% 4.5% 4.6% 12.7% 16.% 5.3% 9.2% 5.4% 7.7% The cost of intermediation ratio 1 was used in order to analyze operational efficiency of the banking system. The analysis shows that despite the expansion of the banking activities and increase in related expenses over the year, the ratio remained unchanged and was 4.9% (Chart 25). While banks experienced some positive trends in dynamics of operational efficiency, they should continue their endeavors to optimize expenses and ultimately increase performance profitability. Thus, it is important that banks continue automating business processes, apply advanced technologies of banking services, etc. 4.9% 4.9% 4.9% 7.7% 1.1% 4.6% 8.5% Growth rate of attracted funds Growth rate of administration expences Administration expences/attracted funds, right hand axis 6% 4% 2% % 9 Expenses to income ratio = Non-interest expenses / (Interest income + Non-interest income)*1 1 Cost of intermediation = 26

27 Box 4. Profitability of the banking system in Azerbaijan international comparison Comparison of profitability and efficiency of the Azerbaijani banking system with the same indicators of other countries demonstrates that the banking system of the country is competitive. Chart 26. ROA 5% 4% 3% 2% 1% % 4.7% 2.8% 2.2% 2.2% 2.1% 1.9% 1.9% 1.5% 1.5% 1.4% 1.2%.8%.6%.5%.4%.4%.3%.1% The ROA indicator (1.5%) of the Azerbaijani banking system approximates to the average indicator (1.46%) in countries shown in the chart. Argentina Georgia Turkey Belarus Mexico Kazakhstan Russia Azerbaijan Malaysia Brazil Poland India Romania Korea Hungary United States Croatia Ukraine Argentina Georgia Mexico Turkey Malaysia Belarus Russia Brazil Kazakhstan Poland Azerbaijan India Korea Romania Hungary United States Croatia Ukraine 6.4% 5.% 4.4% 3.% 2.4%.8% 21.1% 19.3% 19.% 15.6% 15.3% 14.% 14.% 13.8% 13.2% 11.7% 11.1% 4.6% Source: IMF and CBA Chart 27. ROE 5% 4% 3% 2% The ROE indicator (11.7%) of the Azerbaijani banking system approximates to the average indicator (12.8%) in countries shown in the chart. 1% % Source: IMF and CBA 27

28 Chart 28. Efficiency 1% 9% 8% 7% 6% 5% 4% 3% 2% 92.7% 87.7% 66.3% 65.9% 65.3% 61.5% 56.3% 55.7% 53.9% 52.5% 5.% 49.1% 49.% 48.7% 47.5% 47.1% 36.3% 35.4% The Azerbaijani banking system is in favorable conditions in terms of overall efficiency of the banking business. Banks operating in Azerbaijan had the cost-to-income ratio of 36.3% (the average indicator in the group was 56.7%). 1% % Belarus Croatia Russia Source: IMF and CBA Ukraine United States Korea Romania Poland Brazil Malaysia Mexico Argentina India Turkey Georgia Hungary Azerbaijan Kazakhstan 2.4 Capitalization of the banking system CBA s decision to tighten the minimum capital requirement for banks triggered the growth of capital. Thus, in accordance with the CBA s decision banks aggregate capital should not be less than AZN 5 million as of Consequently, capital of the banking system rose by 33% (AZN 747 million) during the year and totaled AZN million in 213. Banks continued the capitalization process in the current year as well: over the first quarter the aggregate capital rose by 5% (AZN 145 million) and reached AZN million (Chart 29). Chart 29. Capital adequacy ,886 31/12/ ,86 31/3/ , , /6/212 3/9/212 2,582 31/12/212 2,68 31/3/213 2,884 3/6/ ,16 3/9/ ,427 31/12/213 Total equity, mio.man., right hand scale Capital adequacy ratio, % Leverage ratio, % 3,571 31/3/214 Rapid growth of the total capital of the banking system has been accompanied with a rise in solvency ratios. In 213, the capital adequacy ratio increased 1.2 p.p., the leverage ratio 1 p.p., reaching 18.1% and 11.4% respectively as of The banking system continued to strengthen its capitalization position over the first quarter of the current year. Thus, the capital adequacy ratio remained unchanged; the leverage ratio reached 12.2% as of The capital adequacy ratio for systemically important banks was slightly lower than the

29 average ratio of the system 16.7% at the end of 213. The capital adequacy ratio for other banks was above the system average 28.3%. Results of monitoring conducted in separate banks demonstrate improvement in capitalization of banks (Table 5). Table 5. Grouping of banks on capital adequacy Interval Below 12% 12% - 16% 16% - 2% Above 2% Total Date The number of banks with the capital adequacy ratio below 12% remained unchanged in 213 (however, one more bank was added to the list over the first quarter of the current year) and their share in assets of the system shifted to 6.9% (in 213) from 7.4% (in 212). The number of banks with the capital adequacy ratio between 12%-16% decreased from 1 to 6. As of , the share of banks with the capital adequacy ratio above 2% constituted 33.7% of the banking sector. Chart 3. Capital s growth structure 6.% 47.8% 5.% 4.% 36.9% 32.7% 3.% 17.9% 2.% 1.% 7.9%.% -.6% -1.% -2.% Deductions other instruments Reserves Current year income Retained earnings Shareholders equity Total equity growth Capital s growth structure in banks remained unchanged in 213 in comparison to previous years (Chart 3). Capital growth primarily stemmed from the share capital; the share capital made a 25% contribution to aggregate capital growth (29% in 212). The contribution of profit (net income and retained earnings) to growth was 5 p.p. 29

30 relative to 212 and equaled 5%. On the contrary, the contribution of other capital elements (subordinated debt liabilities, hybrid elements) decreased considerably (6 p.p.) over the year and totaled 3%. All these factors supported the CBA s efforts in improving the overall quality of capital, as well as increasing banks sustainability, and their resilience to risks. Chart 31. Quality of capital 3,5 3, 2,5 2, 1,5 1, 5 1, , , The share of Tier I capital in the capital structure of the banking system was 78% as of year-end. The ratio of Tier II capital to Tier I capital decreased to 29%, which is considered to be a qualitative indicator in international practice (Chart 31). It should be noted that preference for the share capital in building capital is consistent with recent global banking trends on improving supervision and strengthening financial sustainability. 1, , Chart 32. Capitalization and assets dynamics % 37% 25% 26% 3% 29% 2, %* 3, I quarter Tier I capital, mio. man Tier II capital, mio. man. Tier II capital / Tier I capital, right hand scale *annualized _1-1 Equity growth quarter RWA growth Capital adequacy ratio, left hand axis RWA/Assets, left hand axis The capitalization level of the banking system kept growing along with growth of riskweighted assets in 213 (Chart 32). Risk-weighted assets rose 23.6% and constituted 84.1% of total assets over the year. Banks continued their risk-adequate capitalization policies over the past period of 214, which is likely to be strengthened in the future. Thus, relevant measures are currently being taken jointly with international organizations to establish a regulatory framework for operational risk in line with advanced practices. A road map was prepared and negotiated with banks concerning developing and implementing a supervisory 4% 3% 2% 1% %

31 framework for management of operational risk in the banking system. In the initial phase, the Basic Indicator Approach 11 is to be applied. Relevant analyses have been conducted to assess potential impacts of the application of the approach on capital and capital adequacy of the banking system. Chart 33. International comparison on capital adequacy 25% 2% 15% 1% 5% % Source: IMF, CBA 2.9% 19.% 18.3% 18.1% 18.% 16.9% 16.6% 16.1% 15.7% 15.6% 15.2% 14.7% 14.4% 14.% 13.9% 13.5% 13.4% 12.6% Croatia Belarus Ukraine Azerbaijan Georgia Hungary Kazakhstan Brazil Turkey Mexico Poland Malaysia United States Korea Romania Russia Argentina India countries (Chart 33). Analysis findings suggest that proposed capital requirements on management of operational risk may cause the capital adequacy ratio of the banking sector to diminish by of 1.1 p.p.. The capitalization level of the Azerbaijani banking system is satisfactory compared to banking systems of other 2.5 Credit risk Despite total growth of the credit portfolio, banks maintained credit risks at a satisfactory level over the period. Chart 34. Quality of credit portfolio 8% 6% 4% 2% % 2.2% 3.6% 5.4% 6.4% 6.1% 5.1% 5.4% Overdue loans growth (annual) Loan portfolio growth (annual) Overdue loans/loan portfolio (left hand axis) historical maximum 6.4% (211) to 5.1% (213). 1% 75% 5% 25% % Unlike previous periods, in the first quarter of the average annual growth rate of overdue loans (16%) was below the total portfolio growth rate (21%) (Chart 34). Slowdown in the growth rate of overdue loans also caused their share in the portfolio to fall from its 11 In line with recommendations of the Basel Committee the capital reserve on operational risk equals 15% of aggregate income over 3 years when applying this approach. 31

32 Chart 35. Share of overdue loans in total credit portfolio % Dynamics of overdue loans was primarily affected by quality improvement of short-term (less than one year) loans. The share of overdue loans in the total portfolio in the Azerbaijani banking system is acceptable in comparison to international levels (Chart 35). Loans granted during the boom period, with weak credit underwriting, account for a considerable portion of overdue loans of the Azerbaijani banking system. At the same time, it should be noted that the banking system has a high potential to absorb risks likely to arise out of these types of assets. Thus, established reserves equal to more than 8% of overdue loans. A surge of activity observed in the consumer loans market over recent years necessitated adequate management of credit risks. Thus, another consumer loans segment covering unsecured cash loans displayed particular growth. Consequently, the share of such loans in the credit portfolio increased about 1 p.p. and reached 37.3% in Romania Source: IMF Chart 36. Structure of consumer loans 37.3% 19.5 Kazakhstan 27.5% 4.2% 8.7% 8.5% 17.6 Hungary Croatia 6.6% 12.9 Ukraine 24.1% 12.4 Moldova 6.4 Latvia 27.8% 35.5% 19.9% Another significant segment of loans granted to the population is mortgage and real estate related (construction, repairs, etc.) loans (the share in the portfolio 27.8% as of ) (Chart 36). In the presence of strict supervisory requirements (AMF standards, CBA requirements), risks on those loans are at a minimum level. The size of mortgages and loans related to construction and repair of real estate rose 27% over the year. 5.2 Poland 5.2 Czech Republic Azerbaijan 4.6 Belarus 3.8 India Purchase, constructio n and repair of residential property Car loans. Purchase of households equipmets Credit cards Others 32

33 2.6. Liquidity risk Diverse dynamics of the market conjuncture, behavior of banking and economic entities (corporate sector and population) and other factors affected the liquidity of the banking system in 213 (Chart 37). Chart 37. Factors affecting the banking sector liquidity quarter % % -2.5% 5.8% 3.1% 4.1% totaled 11.2% over the year. 14.2% 15.5% 19.6% 8.2% 5.9% 15.2% 18.1% 2.3% 17.4% 3.9% 29.2% 55.1% -2% % 2% 4% 6% Deposits growth, % Loans growth, % Liquid assets growth, % Thus, the size of liquid assets decreased 12.9% due to an increase in the loan portfolio amid stable growth rate of deposits (15.2% in 213). However, a more rapid increase in deposits compared to bank loans led to a 14.2% rise in liquid assets over the first quarter of the current year. The ratio of average annual liquid assets to average volume of assets declined slightly and Chart 38. Structure of liquid assets 3, 2,5 2, 1,5 1, Over the first quarter of the current year this ratio rose to 12.2%. In 213, average daily balance of high quality liquid assets decreased by AZN 42 million (2%) relative to the previous year and totaled AZN 213 million (Chart 38). The share of cash funds in the structure of high quality liquid assets was 35%. As of the share of nostro accounts and treasury bills in the structure of liquid assets was 19% and 13% respectively. The share of banks accounts with the CBA in liquid assets was 33% as of the end I rüb Treasury bonds Nostro Due from CBA Cash Average daily liquid assets (annual) 33

34 Quick ratio 12 and current ratio 13 declined due to the fact that the growth rate of current liabilities (5% in 213) of the banking system (including the demand deposits) prevailed over that of liquid assets (Table 6). Table 6. Liquidity indicators Quick ratio Current ratio In terms of risk management, maturity gap between assets and liabilities of banks remained at a satisfactory level (Chart 39). Nevertheless, the maturity gap level and trend display the lack of a long-term sustainable resource base to finance investment projects in banks. Chart 39. Maturity gap of assets and liabilities, (as a percentage of assets) 214 I quarter Banking system liquidity is at a manageable level. High quality liquid assets exceed demand deposits of individuals and cover a substantial part of their term deposits over 365 days days days 31-9 days -3 days 12 Instant liquidity ratio ratio of average daily price of bank s high quality liquid assets to average daily amount of high quality liquid (up to 3 days) liabilities. The minimum prudential requirement is 3%. 13 Current liquidity ratio - liquid assets to current liabilities ratio 34

35 Box 5. The liquidity position of the Azerbaijani banking system under stress: simulation of the implementation of the Basel III Accord The global financial crisis has revealed that banks manage liquidity risk inadequately and inefficiently in some countries. High contagion of the liquidity risk and its role as catalyst of systemic instability necessitated adoption of new and tougher norms. A new set of regulatory measures for banks developed by the Basel Committee on Banking Supervision (BCBS) Basel III standards were approved by G2 countries in December, 21. Along with innovations on capital of banks (concept, minimum requirements, buffers, etc.), the other norm recommended within Basel III standards is the Liquidity Coverage Ratio (LCR) intended for management of liquidity risks. New verified regulatory standards of the BCBS were published in January, 213 (Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools, Basel Committee on Banking Supervision, January 213). The key goal of applying the LCR is to increase resilience against potential liquidity shocks over a 3 day horizon (short-term shock scenario) by keeping sufficient liquid funds in a bank. The LCR indicates the ratio of unencumbered high-quality liquid assets at the disposal of the bank to net cash outflows from the bank over a 3 day horizon. According to recommendations of the BCBS the ratio should not fall below 1 percent. Liquid assets are grouped as follows in terms of quality: Level 1, Level 2A and Level 2B high quality assets. Level 1 high quality liquid assets cash funds, funds in central banks, government bonds, claims to central banks, other high quality bonds Level 2A high quality liquid assets Corporate bonds not below AA rating (excluding bonds of financial institutions), bonds of foreign countries and central banks with a 2% risk rate, international development banks' bonds Level 2B high quality liquid assets Corporate bonds between BBB - /A+ ratings (excluding bonds of financial institutions), shares in accordance with Basel III standards 35

36 Note that, according to the standards, the volume of Level 2A liquid assets is limited to 4%, while Level 2B high quality assets to 15% of high quality liquid assets. When calculating the LCR net cash outflows over 3 days implies the gap between liabilities outflow at weights set by the BCBS and assets inflows. According to the BCBS s decision the LCR ratio is to be applied gradually, starting from 6% minimum requirement in 215 to reach 1% in 219. An initial estimate of the LCR ratio was conducted within measures of improvement of liquidity risks management mechanisms and harmonizing the existing regulatory practice with advanced international standards in the Azerbaijani banking system. During the estimate the most conservative approach was applied due to the insufficiency of database to calculate the LCR ratio. As per Basel standards cash flows to/from the bank are measured in certain weights in terms of liquidity during stresses. For instance, bank s deposit portfolio is divided into stable and unstable sections depending on the type of deposits, agreement terms, etc. and each section is measured in individual weights in order to calculate cash outflows from the bank during a deposit run. Unlike the method set under the methodology that requires to take into consideration potential payments on deposits over last 3 days in order to calculate cash outflows from a bank LCR calculation for the Azerbaijani banking system takes into account the whole deposit portfolio. On the basis of the determined approach Level 1 high quality assets are estimated to prevail in the Azerbaijani banking system and equal 82% of total high quality assets. Besides, the share of non-financial corporate sector funds in cash outflows from banks is 22%. The share of cash withdrawals of the population based on a likely limit in cash outflows from banks constitutes 21%, while the share of financial sector funds is 24.8%. The share of loan LCR application chart 1% proceeds in the structure of cash flows 9% to banks is 38%, proceeds from 8% financial institutions and central banks 7% 34%, and proceeds from transactions 6% with non-financial institutions 25%. Thus, initial estimate results for banks of Azerbaijan suggest that the LCR s average system indicator equals 87%, higher than the minimum requirement (6%) set by the BCBS for /1/215 1/1/216 1/1/217 1/1/218 1/1/219 Source: BCBS, CBA Source: BCBS 36