Fitch Ratings on Problem Assets and IBA Privatization

The planned purchase of distressed assets and the subsequent privatization of OJSC International Bank of Azerbaijan, according to the international rating agency Fitch Ratings, will have a moderately positive impact on the credit ratings of the country's largest credit agency. According to the latest data, the long-term forecast of issuer default of IBA is , / .

The agency experts believe that everything will depend on the amount of repurchased problem assets, which could affect the improvement of the quality of total assets, capitalization of the bank and its relationship with the state and new shareholders.

Recall that on July 15, the President signed a decree on the transfer of troubled state assets of IBA to the non-bank financial institution JSC Agrarkredit. It is requested to issue guaranteed bonds, using the proceeds from the issue for the acquisition of a number of risky assets from the bank.

According to Fitch, the size of the problem assets of IBA is significant, despite the fact that the inactive (overdue for 90 days) and extended credits as of January 1 were only moderate 7.2% and 6.6% of the gross loans, respectively. According to experts of the agency, loans with high risk (project finance and startup loans in the construction sector with great grace period) amounted to about AZN 1 billion (11% of the gross loans) at the end of the first quarter of 2015. Additional problems with asset quality and corporate governance are associated with the old portfolio of promissory notes (about 700 million AZN, less allowance for loan losses), the largest of which is related to the construction project in Russia with a high risk that the projects will not be completed. Coverage of NPLs with reserves was at an acceptable level of 135% at the end of 2014, but extended credits, large high-risk loans and promissory notes portfolio were three times the fixed capital at the end of 2014, according to Fitch.

Regulatory core capital ratio at the IBA was at a moderate level of 7.7% at the end of March 2015, while the rate of fixed capital (methodology of Fitch) probably declined significantly from 7.4% in late 2014 due to the devaluation of the manat in the first quarter of 2015.

The agency considers the bank's capitalization weak due to the low level of capital and a significant amount of assets with a high degree of risk, which may require additional redundancy. At the same time indicators of capital may increase by about 2% by the end of the year as a result of payment of the last tranche of 200 million AZN in bank capital as part of the recapitalization program. Moreover, the potential sale of problem loans can not only improve the quality of assets, but also significantly reduce the asset risk-weighted.

Long-term issuer default rating and senior debt ratings of IBA, which are at the level , reflect the potential support from the Azerbaijani authorities, if necessary, taking into account the high systemic importance of the bank, majority state ownership (51.1%) and rather small size of the bank relative to available resources of the state. At the same time, Fitch believes that the willingness of sovereign support is only moderately due to non-uniform history of supporting and taking into account the problems of corporate governance at the bank.

If the sale of troubled assets and the planned capital injection lead to a marked strengthening of the capitalization of the IBA, the agency will regard this as a significant improvement in the history of state support, which could be positive for the IDR and senior debt rating of the bank. When considering the possibility of raising its ratings, Fitch will also take into account the potential impact of the privatization of the IBA.

Sale of the state share of assets to private owners is unlikely to mean a refusal of the authorities to support the bank, because the agency considers it a high probability given the importance of the IBA for the local banking system. In fact, the bank is bound to the public sector, as 18% of its liabilities, or about 1.5 billion manat as of 1 January of this year accounted for structures under state control. The agency fears here that the purchase of assets by the new owners of the bank will be paired with local political elites. The reason for that is a decade of fruitless talks on the privatization of the IBA, and mood swings at the leadership. "So it is not known when and under what conditions the bank will be privatized," the report of Fitch says. --17D-