Ratings agency Standard & Poor's (S&P) downgraded Azerbaijani Muganbank's credit ratings from 'B-/B' to 'CCC+/C' with a negative outlook on June 21. In its report, the agency justified its decision by the degradation in the lender's credit profile, particularly its liquidity and capitalisation, on the back of unfavourable operating conditions for midsized banks in Azerbaijan.

Azerbaijan is currently experiencing a full-fledged banking crisis that started with the depreciation of the manat in 2015, prompting the regulator to revoke the licences of 11 small- and medium-sized banks and authorities to take control of the country's largest lender, International Bank of Azerbaijan (IBA), which was on the brink of default.

More recently, IBA defaulted on its foreign obligations  - worth $3.3bn - in May. The European Bank for Reconstruction and Development (EBRD), a shareholder in two other banks - Unibank and Demirbank - has since increased its stakes in the lenders by injecting capital in them.

On June 14, ratings agency Moody's downgraded the baseline credit assessments (BCAs) and ratings of four other medium-sized lenders - Xalq Bank (rating from B2 to B3, BCA from b3 to caa1); Bank Respublika (rating from B2 to B3, BCA from b2 to b3), Bank of Baku (rating from B3 to Caa1, BCA from b3 to caa1) and the Azerbaijani subsidiary of Russia's VRB Bank (rating from B2 to B3, BTA from caa1 to caa3).

In 2016, Muganbank faced material outflows such as a 30% decline in deposits, a 77% drop in liquid assets to AZN14.5mn (€7.6 million) and an overall contraction in assets of 17.14% to AZN470mn. The ratio of non-performing loans (NPLs) climbed to 15% of its gross portfolio and the bank restructured another 10% of the loans. The bank ended the year with material credit losses and a net loss of AZN12mn, which prompted the cost-of-risk to peak at 8%, S&P wrote.

"This development reflects Muganbank's business focus, including loans provided to individual entrepreneurs, which suffered from the economic slump in Azerbaijan and the manat devaluation last year. Although we expect that the growth of non-performing loans will slow in 2017-2018, we think that these loans will reach 20% of the loan portfolio this year, with another 10%-12% of restructured loans, therefore remaining below peer average," the agency said in its report.

S&P expected the bank's capitalisation to remain under pressure in the next two years, despite support from shareholders, who injected AZN25mn in the lender in 2016 to support it. Furthermore, the agency expected the bank to have difficulty fulfilling its financial obligations.

Sources in Baku have told bne IntelliNews that the bank is expected to go bankrupt. Attempts to access the lender's financial statements in 2014, 2015 and 2016 have proved unsuccessful, as they appear to have been removed from the web.