BAKU, Azerbaijan, October 15. Concentration in Azerbaijan's banking sector remains moderate and has been declining in recent years, Shahin Mahmudov, director general of the Central Bank of Azerbaijan (CBA), said at a press conference on Thursday dedicated to the presentation of the Financial Stability Report, Trend's correspondent reports from the event.
He said the CBA's assessment showed that competition in the banking services market had improved compared with previous periods.
“Concentration in the banking sector is related to individual banks' market shares and their importance to the financial system. In many countries, the presence of systemically important banks is a characteristic feature of financial markets.
“Almost every country's banking sector has larger financial institutions that are more important to the system than other banks. In Azerbaijan, we currently assess concentration as moderate. We are not seeing high levels of concentration,” Mahmudov noted.
According to him, the market has recently shown a downward trend in concentration. Although state-sector activity and other factors can affect individual banks' market shares at certain times, the overall picture indicates improving competition.
The CBA official said that in previous years, large and small banks had faced significant differences in funding costs. These costs and profitability indicators have since become more similar.
“Previously, there were considerable differences between large and small banks in terms of funding costs. These costs, as well as profitability indicators, are now more comparable. Naturally, large banks have greater capacity to invest in personnel, technology, and systems and to offer customers a wider range of services. This is a normal consequence of differences in bank size. However, from the customers' perspective, we are seeing a trend toward lower concentration,” he said.
Mahmudov also emphasized that distributing salary payments among banks could have a positive impact on competition. According to him, giving customers more options when choosing banks for their salary cards makes it easier for other banks to enter the market, attract additional customers, and offer lending and other services.
“Distributing payroll funds and salary payments among banks is one of the mechanisms that can help reduce concentration. When customers have more options in choosing a bank, other banks also have greater opportunities to participate in the market and offer their services. However, it will take time and infrastructure changes for the full effects of these developments to become apparent,” the director general said.
He added that the impact of regulatory measures introduced by the CBA was also taken into account when assessing trends in banking-sector concentration. Individual banks' shares in the lending and mortgage markets may change during certain periods, but longer-term observations are needed to assess the overall trend.
Mahmudov also clarified the Financial Stability Report's assessment that small and medium-sized banks are more vulnerable to financial shocks.
He said the analysis primarily aimed to compare the financial resilience of systemically important banks with that of other banks and to determine regulatory and supervisory mechanisms appropriate to banks' risk profiles.
“The analysis of the greater vulnerability of small and medium-sized banks to shocks is intended to compare large, systemically important banks with other institutions. Under the existing regulatory framework, systemically important banks are subject to additional capital requirements. They are also subject to more intensive supervision,” he said.
According to the CBA official, changes in Tier 2 capital must also be considered when assessing banks' capital structures. The existing approaches in this area are scheduled for review by the end of the year.
He noted that one of the main components of Tier 2 capital is current-year profit. At the end of the year, transferring that profit to another component of capital in accordance with the applicable rules may lead to a decrease in the Tier 2 capital indicator.
“This is a matter of capital structure and, to some extent, a natural process. Current-year profit is one of the main components of Tier 2 capital. When that profit is transferred to another capital component at year-end, the amount of Tier 2 capital changes accordingly. Therefore, assessments should consider not only the Tier 2 capital indicator but also the overall level of capital,” Mahmudov emphasized.
He added that properly assessing capital indicators was important for determining banks' financial resilience and evaluating their ability to withstand risks.