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International Bank of Azerbaijan First Victim of Devaluation


So, the first victim of the devaluation of the manat is known – it is the Chairman of the International Bank of Azerbaijan Jahangir Hajiyev, 54-year-old successful banker.

A concise statement of the Supervisory Board of IBA says that he was removed from office (which had been held since 2001 - Turan) for health reasons.

The temporary head of the largest bank in the country was assigned to the first deputy chairman Emil Mustafayev.

"The Finance Ministry representing the Azerbaijan State in the bank assured that it would continue to give its full support to the development of the largest bank in the country," the website of IBA reported to reassure depositors, and not only the IBA.

After the crisis of 2008-2009 the Ministry of Finance and the President were unhappy with the initiatives of the bank’s head that have not received support from them, so his resignation was natural. As for Mustafayev, he is considered as a temporary figure, an expert in the banking system said.

IBA is the largest bank in the country and the only bank in which a majority stake is owned by the state.

By the end of 2013 IBA took the 31st place in the ranking of the largest banks in the CIS. It demonstrated the growth of assets by 24.5% to 9.8 billion US dollars. Besides the IBA in the rating were 4 other Azerbaijani banks, which are located in the interval from 137 to 194 places.

But the history of the bank shows that it does not pass the test of the financial crisis, as it was in 2008-2009 and now.

In October 2009, Fitch Ratings referred almost one-third of all loans from the International Bank of Azerbaijan (IBA) to the category of problem. To date, customers' problems with the payment of bank loans resulted in 27.8% of "bad debts" in the loan portfolio of IBA.

To these results the Agency experts came by the analysis of indicators provided by the bank. Experts note that, by international standards, exceeding the five percent level of this indicator is already a base to raise an alarm.

The IBA representative Rauf Agayev in an interview with Radio Azadlig confirmed the presence of such a problem at the bank.

However, problems during the financial crisis of 2008-2009 were experienced not only by IBA. The then director of the Moscow office of Fitch Ratings for Financial Institutions Vladimir Markelov told Turan that in January-June 2009 asset quality deteriorated in all the Azerbaijani banks. The worst situation in this respect was observed in IBA.

In the structure of problem loans of IBA 18.6% of them were overdue and 9.2% - restructured, on which the recipients once again came to agreement with the bank to change the terms of payment.

At the same time the head of the press service of the International Bank Rauf Agayev in an interview with Radio Azadlig noted that much of the bad loans of the bank account for the funds allocated to public projects: "There are companies for the development of which we have allocated funds, but the money has not yet returned. Some state projects require long-term implementation."

At the same time, Agayev did not answer on what public projects loans are not returned.

At that time, in order to maintain the inefficient banking system the central bank increased the amount of 2% centralized loans to banks 10 times.

The Chairman of the NGO Center for Economic Research Gubad Ibadoglu believes that this problem occurs in the IBA and other domestic banks due to their poor management. According to him, financial managers should take into account the global financial crisis and be able to manage risks in the crisis.

More than half (50.2%) of the shares in IBA are owned by the state. According to Ibadoglu, in the case of deterioration of the situation the government will take measures to rescue the bank. The expert believes that dealing with banks through lending will give only temporary results and there is a need for more drastic measures.

"In the banking market, there are discrimination and entry barrier, and for the market to be free and developed due to competition, these obstacles should be eliminated. Unfortunately, the government does not do this," Ibadoglu said to radio Azadlig.

A similar situation began to take shape in the course of the current financial crisis caused by the delay in the reform process and aggravated by the decline in oil prices.

  After the crisis of 2008-2009 the Ministry of Finance and the President were unhappy with the initiatives of the bank’s head that have not received support from them, so his resignation was natural.

The first bell rang on July 1, 2014, when there were technical problems in IBA, which led to a halt of the bank. "In connection with the end of the quarter and the beginning of the holiday season there were too many operations, so technical problems occurred", they explained the situation in the bank.

Foreign investors and depositors, which were mainly concentrated in IBA in the last year, with the beginning of the fall in oil prices, began to feel the looming financial crisis in Azerbaijan. Recently, the head of the Central Bank Elman Rustamov admitted that in the second half of 2014 and the beginning of 2015 there was marked a significant withdrawal of capital from banks by foreign investors. Specific figures were not called, but unofficial estimates are hundreds of millions of dollars.

Just the day before, March 6, to stabilize the situation IBA raised the interest rates on deposits from individuals in manat by 2-3%.

In early March, Fitch Ratings reported that IBA («BB» / forecast "Stable» / «b-»), is likely to require additional support to mitigate the effects of the devaluation of the manat and restore capital ratios.

On the basis of management reporting Fitch estimates that up to the devaluation high 58% of IBA credits were denominated in foreign currency. This means that the fall of the manat to the US dollar by 34% on February 21, from 0.78 to 1.05 manat, led to an increase in the cost of the loan portfolio in manat by about 20%.

This increase in risk-weighted assets also would mean that the regulatory capital adequacy ratio could be reduced to a level below the minimum 12% (from 12.02% at the end of 2014). This was partially offset by the support of capital in the form of subordinated debt of 250 million manat received on February 27 from the Central Bank of Azerbaijan. In addition, IBA received from CBA dispensation from regulatory requirements for one year, according to which the regulatory capital adequacy ratio may decrease to 10%.

IBA management informed Fitch the bank will speed up the new issue of capital 100 million manat, of which 50 million AZN is expected to be granted by the Ministry of Finance in March. This issue will be held in the framework of the recapitalization of the bank in the volume of 500 million manat adopted in 2013, according to which by the end of 2014 200 million manat had already been received. In addition, on April 2 a meeting of shareholders will discuss the possibility of issuing additional shares. Fitch expects that in the event of any delay in the provision of new capital, dispensation from regulatory capital requirements will be extended for IBA.

Fitch does not expect that IBA will have any significant losses as a direct effect of the devaluation, as the bank according to its management accounts covered the short open foreign currency position (which was significant at the level of $ 1.4 billion or 1.3 x capital, as at the end of 2014) in January and February. At the same time, the position was closed by means of conversion of about 17% of the loan portfolio of AZN in dollars, resulting in a significantly higher dollarization of the portfolio. After the devaluation the currency loans account for a high 65% of the portfolio, which Fitch views as a source of significant credit risk in view of the fact that some borrowers may not have income in foreign currency.

Long-term issuer default rating and senior debt rating at «BB» of IBA reflect the moderate probability of support from the Azerbaijani authorities, if necessary, taking into account the high systemic importance of the IBA, a majority stake owned by the state, quite small relatively available resources of the state and potentially significant reputational damage for the authorities in case of default of IBA.

IBA is the only bank where a majority stake is owned by the state, which is not in a hurry with its privatization. For unclear reasons, the government put aside the roadmap for restructuring, reform and privatization of IBA, prepared by the IMF in 2012. Its implementation, according to the IMF, will open opportunities for the development of private banks, as well as diversifying the risks facing the country's banking system.

In Azerbaijan there were 46 banks. And IBA no longer holds a special position - it is bypassed by Pasha Bank, Capital Bank and others. At the moment, the ratio of the assets of Azerbaijani banks to GDP is relatively low - about 30%.

Turan Analytical Service



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