Ratings agency Fitch has affirmed Azerbaijan's largest lender, International Bank of Azerbaijan (IBA), at 'BB' with a negative outlook, but downgraded its viability rating (VR) from 'b-' to 'f' on November 22 to reflect the agency's view that “the bank has failed” after confirmation that the state had to cover NPLs that were three times higher than initially believed.  

In affirming its primary rating, Fitch noted that the government, which is rated one notch above the lender, is likely to provide support to the bank if needed. The negative outlook corresponds to that of the government.

In 2015, the authorities took over IBA's management, which had incurred billions in non-performing loans (NPLs), a problem that was accentuated by a 50% devaluation of the Azerbaijani manat. In addition to giving out loans to politically connected individuals, IBA, which holds 35% of the banking sector’s assets, had a flawed business model that saw it borrowing internationally in foreign currency and lending in manats. Authorities invested over AZN2bn in the lender in 2015, and announced an additional AZN500mn capital injection in February. However, when reviewing the bank's accounts, Fitch found that authorities had actually purchased some AZN10bn worth of NPLs, which effectively meant that the bank had failed.

According to Fitch, Baku has “initiated the clean-up of IBA's balance sheet and completed the purchase of AZN10bn (€5.42bn) problem exposures from IBA”. Meanwhile, the VR rating downgrade reflects Fitch's view that the bank has failed. This in turn reflects the agency's view that the asset purchases completed in the first half of 2016 revealed a material capital shortfall, given the very large volume of weakly-reserved exposures being transferred. The AZN10bn of transfers reported in the H1/16 IFRS accounts was considerably more than the AZN3bn planned when Fitch reviewed the bank's ratings in March 2016.

Furthermore, Fitch believes that the lender's capitalisation is “likely to have come under further pressure since end-H1 due to translation losses and negative core operating results. IBA's short open currency position under IFRS was equal to AZN6.3bn at end-H1, as payments for transferred loans were received in manats, while the majority of the loans sold were dollar-denominated. The manat has depreciated by 11% against the dollar since end-H1, meaning that IBA would have lost its entire IFRS equity if its currency position has remained unchanged,” the agency wrote, adding that the bank has become structurally loss making due to insufficient interest-yielding assets.

However, further measures are planned to improve the bank's solvency, including an AZN500mn equity injection, credit risk transfers, the purchase of the latest loan exports for dollar-denominated loans and the conversion of accounts o state-related depositors into local currency.