Banking on Azerbaijan

Can you tell us a little bit about the activities of Pasha Bank?

We opened in 2007 in Azerbaijan, are among the top five banks in the country, and are a part of Pasha Group. We’re a commercial bank geared toward serving the needs of corporate clients, both foreign and local companies—such as SMEs—in Azerbaijan. We have about AZN500 million in assets, and we have a large capital base, the second largest in the country. In March 2011 we increased our charter capital by a further AZN8 million, thus reaching AZN123.4 million. This was achieved by a partial capitalization of the profit for 2010.

Do you also deal with the local bond market?

Pasha Bank underwrites bonds, but our activities in that area are still at a bare minimum. The bond market has only recently emerged in Azerbaijan, and there are very few companies raising capital through the stock exchange. Part of the reason is that there’s no tradition for doing this. The stock market has only been around for about eight years. Now, there is an aspiration within the government to transform Baku into a financial center for the whole region, and the preparations to lay the necessary infrastructure to this end are under way. Our strategy right now is to educate our client base so as to make them amenable to the idea of using bonds to raise capital. There is a need for growth and financing, and we need to get people accustomed to using the bond markets. Although the bond market is still in its fledgling stage here, there is plenty of activity going on, with a lot of foreign companies, including asset management firms, banks, and investment companies, considering to invest in Azerbaijan, and Azerbaijani companies needing to finance their expansion abroad. We see great opportunities in these fields for Pasha Bank.

What are your views on the state of development of the banking sector in Azerbaijan?

The ratio of the total assets of the banking sector to GDP is currently around 35%, which is pretty low. In fact, there are companies in Azerbaijan that are far bigger than the banks, and even the combined banking system would probably not be enough to serve their needs. The banks need to grow bigger and there is a space for that. However, we don’t need to artificially enlarge the banks or merge them through administrative or government pressure. What we need is to help banks move ahead and increase their capital base in a natural way, and to create the right kind of infrastructure to serve their needs and foster the right kind of economic incentives and environment to help them grow. This growth will occur through the introduction of new products and use of new financial instruments. At the same time, both banks and the government need to help educate corporate and individual clients as to what services are offered. One of the high priorities in the government’s agenda currently is to move away from cash transactions towards non-cash operations. This will increase the role of the banking sector as a whole and further enhance its weight in the country’s economy.

Do you see room for foreign banks to establish a larger presence in the Azerbaijani market?

With the rise of the assets of the banks and the increase of their weight in the economy, competition will intensify. As a result, foreign banks may decide to enter the sector and all the parties will benefit from this. As for Pasha Bank, our top priority is to increase our competitiveness so we are able to compete with the foreign banks not only locally but in foreign markets as well.

Do you engage in investment banking activities here?

We’re not operating as a classical investment bank due to certain regulatory restrictions. Obviously, we see our corporate institutional banking division as setting a base for future full-scale corporate investment banking activities. We are currently building up our capacity, recruiting experienced personnel, training them, and setting up relevant policies and procedures in a bid to provide wealth management services. Currently, the wealth management department is conducting project financing, realizing loan syndications, and conducting ECA-covered financing and corporate investment banking, with more products to follow.

Do you have much exposure to the retail side of the industry?

No, we’re not a retail bank. Our only retail activity is maintaining the accounts of our employees, the salary accounts of our corporate clients, and personal accounts for entrepreneurs whose companies are banking with us. Therefore, there is no need for an aggressive expansion of our branch network. Our existing corporate branches, or business centers as we call them, are operating in the Baku area. However, in the very near future we plan to open new business centers in other cities in Azerbaijan, like in Ganja, the second industrial city of the country, and then another one in Zagatala, in the northwest region close to the Georgian border. Later, we will open another two centers in the south and north of Azerbaijan.

What sort of sectors are your corporate clients active in mostly?

Our corporate clients are mostly active in the transport, ICT, agribusiness, trading, services, hospitality, construction, and energy sectors. Over 90% of our clients are from the private sector.

How was 2010 for Pasha Bank? What are some of the key metrics from your audited financials?

That was a difficult year. It was a year when the consequences of the global financial crises were felt most severely. However, the bank has kept its position as the largest commercial bank by total equity, which reached a level of AZN136.82 million, or $171.47 million. As a result of the strategic decision to diversify our assets portfolio, the bank has efficiently managed to keep a balance of services. Pasha Bank’s total assets have reached AZN512.30 million or $642 million, meaning a 67% year-on-year increase. The breakdown of the bank’s assets were as follows: loans to customers comprise 37% of the bank’s assets, the securities portfolio represents 31%, cash and cash equivalents represent 26%, and bank dues make up 5%. The rest refers to other non-current and current assets.

The loan portfolio of the bank has increased 1.6 times and reached AZN196.08 million, or $245.75 million, while the same figure for 2009 was AZN122.08 million, or $153 million.

The effective provision rate on the portfolio was 4.2%, compared to 2% in 2009. Non-performing loans (NPLs) have increased from 0.3% of gross portfolio for the period ended 2009 to 0.6% for the year ended 2010 based on the assessment of the valuation techniques by the bank. The bank’s net profit for the 12 months ended in 2010 dropped by 14% and comprised AZN13.87 million, or $17.38 million. The main reasons behind this were reducing the average interest rates on loans disbursed to customers, and changing the bank’s methodology on valuation techniques related to the creation of loan-loss provisions in the loan portfolio by the group exposure of borrowers, including financial institutions. The interest income of the bank reached AZN33.84 million, or $42.41 million, while non-interest income has doubled and comprised AZN5.26 million, or $6.59 million. Documentary operations balances increased 1.3 times for one year to AZN30.33 million, or $38.01 million, from AZN22.91 million, or $28.71 million in 2009. The ROA of the bank, at 4.09%, is the highest in the sector at the moment. The CAR came in at 53.02% and the ROE was 18.2%.

What’s your outlook for the economy in 2011?

We expect more private sector investment in the country in 2011. The government will continue to act as a major investor, and the government’s infrastructure projects are a very important factor in maximizing economic growth. In the longer term, the importance of the banking sector has to increase as well, especially in its ratio to GDP. Once that is achieved, everyone will be a winner.