Is IBA Preparing for Second Default?

Baku / 10.08.17 / Turan: "The bank keeps afloat hard. There is an outflow of qualified specialists, and inexperienced staff comes to a low salary in their places. Worst of all, investors do not extend their deposit accounts, but close them, transferring the deposits to other banks. In a word, the situation is very bad," one of the employees of the International Bank of Azerbaijan (IBA) told Turan on condition of anonymity, requested to comment on the new report of the authoritative rating agency Fitch Ratings about this credit institution.

Fitch unveiled a new analysis on the prospects for optimizing the IBA. The document notes that the restructuring of the bank"s external liabilities may not be sufficient to improve it.

"The impact of devaluation, as before, is reflected in the economy. The evolution of the structure of monetary policy in Azerbaijan lags behind other oil producers in the CIS. Restructuring of the IBA"s debt obligations, at the cost of potential reputation damage, may not be sufficient to restore the bank"s financial condition," the report said.

State support provided to the IBA since 2013 amounted to 27% of GDP in 2016. A stronger IBA, which ultimately can play an effective role in financial intermediation, will support the economy. However, Fitch analysts are not sure whether the goal will be to restructure external debts. This step is the government"s recent efforts to improve the country"s dominant bank. It is known that in May the bank suspended payments on external debt, and then by means of pressure it received the consent of creditors who possessed at least two-thirds of the total liabilities of $ 3.34 billion.

As noted in the material, a significant part of the country"s banking sector is still experiencing serious problems. At the end of June 2017, the share of overdue loans was 24% of the total loan portfolio, and the capital adequacy was 11.8%. However, it is unlikely that the government is able to provide support to other players in this sector.

Thus, signs of recovery of the IBA after default on external liabilities have not yet been observed and the forecasts are not very comforting.

The banking expert Akram Hasanov agrees with Fitch. In an interview with Turan, the expert said it is necessary to urgently launch the process of privatization of the IBA, especially since it is about saving the country"s leading bank, which has a bad reputation. Poor management and unsecured multibillion-dollar loans have led it to a dangerous line. In a series of urgent measures there are complete replacement of the management, transfer of the bank to new shareholders, the conduct of transparent business, and the optimization of its infrastructure.

"Otherwise, the state plan for saving the IBA can fail. However, in the current circumstances, the Cabinet of Ministers shows a dangerous carelessness and slowness. According to information, the privatization process will begin next year. Why? What are the reasons? To postpone the solution of the problem brings closer the collapse of the bank. Moreover, the IBA completed the past year with large losses, and this year its situation has not improved. Yet another default looms on the horizon, this time on domestic loans," Hasanov emphasizes.

The events around the IBA are closely watched by the experts of the rating agencies Moody"s and Standard & Poor"s. The latter left the sovereign credit ratings of Azerbaijan at the level of BB + / B, meaning "junk" rating, last week.

"I no longer trust the International Bank and the Ministry of Finance of Azerbaijan. The problems can be much broader and deeper than we think," said Moody"s Vice President Peter Paklin, commenting on the feasibility of the bank"s external debt restructuring plan (bbc.com).

According to Greg Saichin from Allianz Global Investors, which also manages the IBA bonds, Azerbaijan should not have forced the debt holders to suffer losses from reputational reasons. Moreover, the financial gain from this for the bank and the government is minimal - by some estimates, not more than $ 350 million.

The actions of the Azerbaijani authorities in the first place will entail a significant increase in the cost of loans for the country and the complexity with which it will face when raising funds to finance its large-scale projects.