Termination of Demir Bank Means Fall of Other Banks

Baku / 25.12.17 / Turan: On December 22, 2017 the Financial Markets Supervision Authority (FIMSA) of Azerbaijan terminated the license of Demir Bank OJSC, which was a surprise for the staff of this bank; on the eve of this decision its leadership announced vacancies, that is, it was going to hire new specialists, and the bank's website published ads with an offer to borrow loans from them.

Surprised was the chairman of the bank's Board Farid Abushev, who refused to explain the reason for the revocation of the license.

"They can say this decision was made hurriedly or with delay, that is, everything is relative, but in any case, the current situation was the reason for making such a decision. I do not want to give any other comments," he said.

The FIMSA explained that the license was liquidated due to the discrepancy between the bank"s aggregate capital and the minimum requirement established for banks, and the adequacy ratio of the aggregate capital is lower than the three percent stipulated by the legislation. The bank has lost the ability to fulfill its obligations to creditors.

The economist Rovshan Agayev is puzzled, because according to the data for the 3rd quarter of this year, Demir Bank held the 15th place in terms of assets (among 31 banks), the 12th place in terms of loan portfolio, and the 20th place in the deposit portfolio. At the same time, following the results of 9 months, the bank fulfilled with a loss exceeding AZN 20 million, and the balance capital was about half the minimum standard.

"To cover minimal losses, the bank had a reserve of about 53 million, which is more than 10% of the existing assets," Rovshan Agayev said.

Consequently, the stay of the closed bank in the middle of the rating on many objective criteria does not guarantee it from failure?

Rovshan Agayev connects successes of the bank with oil money. Before the devaluation of the manat, the bank was significantly strengthened. In 2010-15 the volume of assets grew by 73% to 589 million, but in the last 2 years it decreased by 30% to 429 million manats.

The expert draws attention to the fact that in the years of large oil revenues, the bank's assets doubled in a short time. The bank was mainly engaged in consumer lending. At the end of 2015, 63.3% of the loan portfolio (270 million of 428 million) was consumer loans.

Rovshan Agayev sees the main reason for the closure of Demir Bank in the absence of real competition and proper management in the Azerbaijani banking sector. The remaining several banks exist only at the expense of the state resources and the economic groups behind them, connected with the authorities, Rovshan Agayev asserts.

Two years ago, the expert Natig Jafarli promised that the second devaluation would hit the banking sector, which did not recover from the first devaluation.

"At least half of the 40 banks operating in the country will face serious problems. They will be closed or forced to unite with others. The number of problem loans will grow, and unreturned debts will crush banks that have credit obligations to foreign currency sellers. Small banks are lucky if they are swallowed up by large ones. Bankers will remain unemployed," Jafarli predicted.

And it happened so. Now Jafarli predicts the closure of the Bank of Baku and AG Bank.

The management of the closed Demir Bank calms the depositors, promising the return of their money by the Deposit Insurance Fund (ADIF), in accordance with the law and in order of priority. A liquidator has been appointed and has taken responsibility for the return of deposits.

Pessimistic comments are published in social networks.

"... Also closed Bank Standard - willfully closed to assign the remaining and uninsured deposits. This money will be enough for them till the end of their life," Elvin Ganiyev shares.

Demir Bank was one of the oldest in Azerbaijan, established on October 6, 1989. It received a license on November 23, 1992. Until October 16, 2009 it acted under the name Azerdemiryol Bank, and after re-branding it became known as Demir Bank. The license was revoked on December 22, 2017 by the decision of the Board of Directors of the FIMSA. The license was revoked on the basis of Article 16 of the Law on Banks. The FIMSA appealed to the court with a request to start a bankruptcy procedure against Demir Bank. -0-