Azerbaijani Central Bank Rolling Out Additional Countercyclical Capital Buffer

(MENAFN- Trend News Agency) BAKU, Azerbaijan, January 6. The Board of Directors of the Central bank of Azerbaijan (CBA) has decided to introduce an additional countercyclical capital buffer of 0.5 percent for the total and Tier 1 capital of banks, Trend reports via the CBA statement.

According to the statement, this measure's implementation will begin on March 1, 2025.

“The decision to introduce the countercyclical buffer was made in accordance with the relevant Rules for the Calculation of Bank Capital and Its Adequacy, considering that the credit 'gap' indicator (the deviation of the ratio of the credit portfolio to GDP from its long-term trend) has exceeded the two percent threshold. Besides, the dynamics of high lending observed in the banking sector, its profitability, and financial stability indicators also justified the need for the introduction of the buffer.

As of the end of November 2024, the annual growth of the credit portfolio amounted to 19.6 percent, nearly double the nominal GDP growth in the non-oil and gas sector. In 19 out of 22 operating banks, the credit portfolio grew, with 14 of them experiencing portfolio growth exceeding the nominal GDP growth in the non-oil and gas sector,” the statement said.

According to the rules, the main indicator for activating the countercyclical buffer is the difference between the long-term trend and the current value of the ratio of the total credit portfolio to GDP (the credit 'gap').

“Recent estimates show that this indicator stands at 2.9 percent, making the activation of the countercyclical buffer relevant. The high profitability and capitalization levels in the banking sector also supported the decision to apply the buffer. In the first 11 months of 2024, banks earned 966 million manat ($568.2 million) in net profit, and the return on equity (ROE) was 18.4 percent. The sector's total capital exceeded six billion manat ($3.5 billion), and the total capital adequacy ratio reached 17.5 percent. At the same time, banks paid 456 million manat ($268 million) in dividends in 2023 and 610 million manat ($358.8 million) in 2024.

The introduction of the countercyclical buffer, in line with the recommendations of the Basel Committee, is aimed at strengthening the resilience of the banking sector and supporting financial stability. The application of this macroprudential tool will not only increase the banking sector's resilience to potential shocks but also ensure the continuity of its lending activities,” the statement emphasized.

According to calculations, after the introduction of the countercyclical buffer, the volume of risk-weighted potential assets in the sector is estimated at 18.7 billion manat ($11 billion).

“This indicates that there remains significant potential for expanding the banking sector's credit portfolio even after the adoption of the new decision. The two-month delay in the buffer's introduction allows banks to take it into account in their strategic planning and budgeting, as well as in their capitalization and dividend policies,” added the statement.

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