Azerbaijan’s largest lender set to develop new loan policy

The International Bank of Azerbaijan, the country’s largest lender, will develop a new loan policy under the pre-privatization improvement measures.

The general meeting of IBA shareholders on July 22 took steps to improve the organizational structure of the bank and its branches.

Shareholders decided to transfer the bank's shares in book-entry form in accordance with the law "On Securities of Azerbaijan."

Meanwhile, the IBA’s Audit Committee will examine whether the bank followed banking and civil law when issuing loans, give a legal assessment of the actions of offenders, and implement measures to bring these individuals to justice.

On the same day, the Bank elected Elmar Mammadov as the new chairman of the board, the Baku-based lender said in e-mailed statement. Along with the announcement, three board members were dismissed as their terms expired.

The IBA holds about a third of the assets and loans in the banking system. Its financial situation remained fragile for an extended period of time, despite receiving state support.

Restructuring the largely state-owned IBA so as to reduce its dominance of the sector was set as a priority for achieving a more strong banking system.

Azerbaijan's biggest bank will be privatized after undergoing a cleanup effort to get rid of distressed assets resulting from poor management, President Ilham Aliyev said in a decree on July 15.

"The shortcomings in the management, investment, and loan policy of the International Bank of Azerbaijan in recent years, as well as financing of less efficient, risky investment projects, worsened the bank's financial state, causing an increase in the share of distressed assets and reduced its liquidity," said Aliyev's decree.

These rehabilitation measures should be completed within the next six months and the bank's privatization plan should be submitted to the president, the decree said. The order requires that the bank transfer its disserted assets to the state-owned non-bank credit organization CJSC "Aqrarkredit".

The privatization is in line with advice from the International Monetary Fund.

Raja Almarzoqi, the chief of the IMF mission in Azerbaijan, earlier said that one of the priorities of Azerbaijan’s financial sector is reducing the IBA’s share in the country’s banking market and noted that if the government doesn’t cut its share, the financial sector may face a great risk.

Meanwhile, Fitch Ratings announced that the planned balance sheet cleanup and subsequent privatization of the IBA could be moderately positive for the bank's credit profile and ratings.

The actual impact will depend primarily on the thoroughness of the cleanup, i.e. the extent to which Fitch views the bank's asset quality and capitalization as having strengthened as a result, the bank's new shareholders, IBA operations following privatization, its relationship with the state, and how these may influence the likelihood of government support.

“If IBA is able to sell the bulk of its impaired and high-risk assets at (or close to) book value, this could result in an upgrade of the bank's 'b-' Viability Rating (VR). The VR at present primarily reflects the bank's weak capitalization and asset quality. However, uncertainty remains about the specific assets to be transferred, their amount, and the price that will be paid for them,” according to the Fitch reported dated July 21.

The Baku-based IBA is a universal bank with subsidiary banks in Russia, Georgia and Qatar, as well as representative offices in London, Frankfurt, Luxembourg, Dubai and New York. The bank, 50.2-percent owned by the Azerbaijani Ministry of Finance, was founded in January 1992.

The IBA‘s reported consolidated total assets of 8.8 billion manats, aggregate capital of 1.008 billion manats and net profit of 64.5 million under audited IFRS as at year-end 2014.

The bank’s loan portfolio rose by 16.6 percent, and in early 2015, it stood at 5.868 billion manats.