January 6, 2025, Baku: The decision on the activation of the counter-cyclic buffer has been taken in accordance with the relevant Regulations*, mainly taking into account the fact that the credit gap indicator** is above 2%. Other factors determining the application of the buffer include the strong credit dynamics observed in the banking sector, as well as banks' profitability and financial stability indicators.

According to the data as of the end of November 2024, the annual growth of the loan portfolio was 19.6%. This is up to 2 times higher than the growth of the nominal non-oil and gas GDP. The loan portfolio grew in 19 out of 22 operating banks, including 14 in which the annual growth of the loan portfolio exceeded the growth of nominal non-oil and gas GDP.

According to the relevant Regulations, the difference between a long-term trend and a current indicator of the credit-to GDP ratio (the credit gap) is used as the main indicator for activating the counter-cyclic buffer. According to recent estimates, this indicator amounted to 2.9%, making the activation of the counter-cyclic buffer relevant.

The use of the counter-cyclic buffer was also supported by the high profitability and capitalization level of the banking sector. In the 11 months of 2024, banks earned a net profit of 966 million manats, and the sector's return on equity (ROE) indicator was 18.4%. During this period, the volume of the sector's total capital exceeded 6 billion manats, and the total capital adequacy ratio was 17.5%. In these conditions, banks paid dividends of 456 million manats in 2023 year and 610 million manats in previous year.

The activation of the counter-cyclic buffer is aimed at enhancing the resilience of the banking sector and supporting financial stability, in line with the recommendations of the Basel Committee. The implementation of this macroprudential tool will increase the banking sector's resilience to possible shocks and allow for the continuity of its lending activities.

According to calculations, the volume of potential risk-weighted assets of the sector after the introduction of the counter-cyclic buffer is estimated at 18.7 billion manat. This indicates that even after the new decision, there is still a significant potential for expansion of the banking sector's loan portfolio. Moreover, the introduction of the buffer in two months will allow it to be taken into account in the strategic planning and budgeting processes of banks in the coming periods, as well as in capitalization and dividend policies.

* Regulations on calculation of bank capital and its adequacy

** Deviation of credit-to-GDP ratio from its long-term trend.