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IBA to remove AZN 300M toxic assets from its balance sheet by year-end

22 November 2017 08:00 (UTC +04:00)

As at the end of September 2017, International Bank of Azerbaijan didn't comply with regulatory capital requirements because current year profits, which include most of the gains from the debt restructuring and bad assets transfer, are recognised as Tier 2 capital until the end of the year, and also investments in subsidiary banks are deducted from total capital, Fitch Ratings reported.

Based on the preliminary IFRS accounts, Fitch estimates IBA's Fitch Core Capital (FCC) ratio at around 11% at end-9M17. However, IFRS equity in these accounts (AZN392 million) is understated by around AZN300 million (management's estimation), as the new USD1 billion Eurobond, issued in exchange for the bank's restructured obligations, has not yet been restated at fair value based on its low (3.5%) coupon. Recognising this gain would improve the FCC ratio by an additional 9 ppts. Adjusting also for the 4Q17 gains on the bad loans transfers could result in a FCC ratio of up to a high 30%.

However, Fitch still views the bank's capital position as vulnerable due to the large unhedged short foreign-currency position of AZN3.6 billion (9x Tier 1 regulatory capital adjusted for current year profit and gains on the loan sales). According to the agency, management intends to close the currency position during the next few months via a hedging arrangement with Ministry of Finance and/or conversion of its manat deposits with the CBA into US dollars. However, in Fitch's view there is uncertainty about where these transactions will take place and the terms of any hedges.’

IBA's asset quality has significantly improved during the last 12 months due to the further transfers of bad assets. According to regulatory accounts, the bank's net loan book has contracted to AZN1.8 billion at end-9M17 (24% of total assets), of which around AZN300 million is to be transferred in 4Q17. Remaining loans are of adequate quality, comprising primarily exposures to retail customers and state-owned corporates. Other assets are mainly represented by low-risk local currency deposits placed with CBA (AZN2.9 billion, 38% of total assets at end-9M17) and current accounts with highly rated foreign banks (a further AZN1.6 billion equivalent, 21%).

‘At end-9M17, IBA's liquidity position was comfortable’, the agency said.