PRIVATE KAPITAL BANK

One of the two state-owned banks in Azerbaijan, Kapital Bank, has been privatized at last. It was created within the framework of the Azerbaijani banking system restructuring programme, which was sponsored by the International Monetary Fund and the World Bank, and was therefore always monitored by these financial institutions.

Eastern European experience demonstrates that when several banks are privatized simultaneously, both investors and state encounter problems... That is why the Azerbaijani Government objected to selling off the two state-owned banks at the same time. Although the privatization of the International Bank of Azerbaijan was announced before the privatization of the Kapital Bank, the latter was sold off first.

The most "historic" bank

The world of banking has changed dramatically after the wave of mergers and takeovers in the early 1980's and the trend is still marked today. At present, in order to be a "serious" bank, a financial institution should become a major global player. To achieve this, the bank should be physically present in different localities and service not only individual customers, but should also be involved in the investment business and perform other functions.

But let us go back to Kapital Bank. Being the legal successor of Sberbank (the first savings bank opened in Baku back in 1874) the bank has a background of 133 years in the banking business. In short, Kapital Bank has the longest and richest history in Azerbaijan and also the largest nationwide network of branches.

A few years ago it was called the United Universal Joint Stock Bank (BUS Bank). For its part, the BUS Bank was created by resolution of the Azerbaijani Council of Ministers, following the standard procedure of creating a joint stock company by merging three state-owned incorporated commercial banks - the Agroindustrial Bank, Industrial Investments Bank and Savings Bank - by a decree dated 21 February 2000.

The banking licence issued by the National Bank of Azerbaijan was recorded in the central registry on 28 February 2000. On 29 December 2004, an extraordinary general meeting of shareholders decided to change the name from BUS Bank to Kapital Bank.

It was a "clean" bank, without any outstanding liabilities, because the debts of the dissolved banks were transferred for further servicing to the Agrarkredit credit institution. But the problem of the indexation of accounts at the former Sberbank, of the Azerbaijani SSR, which were opened before 1 January 1992 remains Kapital Bank's problem and will be "bequeathed" to the new owners. Because of the complexity of the process of indexing individual accounts, resumption of the servicing of these accounts has been postponed many times and preparations for this process are under way to this day. Let us note that a government commission headed by Prime Minister Artur Rasizada was established back in 2005 to develop the law 'On indexation of the individual savings at the AzSSR Sberbank'. The 2006 national budget allocated AZN 50 million to begin the process of indexing individual accounts. But, due to the absence of a mechanism of indexation, the budget funds were not spent. It was reported earlier that, in preliminary estimates, the amount of funds required for indexation is $500-600 million and the entire process will take about 7-8 years. The Finance Ministry estimates that roughly 2 million individuals who had savings deposits at the AzSSR Sberbank will benefit from the indexation.

Kapital Bank also supports the programme of development of the regions and many of the government's social projects, including the distribution of subsidies to farmers, the issuance of plastic cards to pensioners and financial aid to internally displaced persons. In addition, it finances projects of social importance.

Before privatization, Kapital Bank employed 2,458 persons. The bank's assets at the end of 2007 were AZN 249.47 million, advances portfolio - AZN 107.51 million, liabilities - AZN 209.56 million, balance capital - AZN 39.81 million, aggregate capital - AZN 35.429 million, and paid-in statutory capital - AZN 24 million.

In just two phases

So, the state decided to sell off the bank. The final distribution of shares after the privatization of the state-owned Kapital Bank was published in early July. By decision of the privatization commission, 85% of the shares (50% were state-owned shares) were distributed between AtaHolding, Pasha Holding, Xalq Sigorta and Azersun Holding.

The AtaHolding Joint Stock Company and Pasha Holding Joint Stock Company received 30% each of the state-owned shares of Kapital Bank, the Xalq Sigorta insurance company received 15%, and the Azersun Holding Joint Stock Company bought 10%. Of the remainder, 10% of shares in the privatized bank were distributed among individual investors and 5% among employees. Purchase agreements with the new shareholders have already been signed.

The first phase of privatization of the state's share in Kapital Bank earned the government $28.236 million at the current exchange rate. The revenue from selling 1.2 million shares, at a nominal value of AZN 10 per share and a total nominal price of AZN 12 million, was AZN 24 million.

AtaHolding and Xalq Bank received a total of 20% of the shares and Azersun Holding has 10%. The shares were sold in five equal packages (lots) valued at AZN 240,000 each.

The second phase of the privatization sale of shares in the state-co-owned Kapital Bank began in March 2008. On 4 April the bank began the private placement of shares for bank employees and individuals with equal legal status. Shares with a total nominal value of AZN 600,000, that is; 60,000 shares, each valued at AZN 10, were sold by auction, representing 5% of the state's share in the bank, which amounted to 1.2 million shares at a nominal value of AZN 10, totalling AZN 12 million. The bank's employees, individuals who had worked at Kapital Bank for more than 7 years and who were now retired and individuals who were unemployed because of changes to the staffing schedule of 1 January 1995, took part in the auction.

At the same time, the state's share of 45% of the stocks of the Kapital Bank Joint Stock Company was sold to legal entities. The total number of shares to be sold was 1.02 million with a nominal value of AZN 10.2 million. The shares were sold in 17 equal AZN 60,000 packages (lots) with a nominal value per lot of AZN 600,000. No more than 6 lots (360,000 shares) could be bought by any one participant in the auction. The fee for participation was AZN 6,000.

Rating concerns

In an earlier report, the Fitch Ratings international agency had predicted that the bank's rating would fall after privatization. In the agency's opinion, the risk of the bank defaulting before privatization was lower because the state, which was the main shareholder, could provide assistance to Kapital Bank at any time.

Fitch experts argue that the acquisition of a large number of minority shares by a highly-rated foreign investor might keep the bank's rating afloat. In view of this, Fitch intends to release a new rating for the bank as soon as information on the results of the second phase of privatization becomes available. At present, the bank's IDR (issuer default rating) reflects the weighted average probability of support by the Azerbaijani authorities.

"After the completion of privatization, the IDR is likely to be downgraded after the change in the probability of support and the support rating floor, which will reflect the authorities' lack of desire to support the bank's activities after privatization," the agency's report read. Today, Fitch's rating for the bank is BB-, the support rating is 3 and a BB- (negative) support rating floor is assigned. The bank's individual rating is D/E. Kapital Bank is working closely with Fitch Ratings and Moody's on the renewal of its ratings.

In the opinion of the bank's management, by issuing these forecasts the agency does not want to assume responsibility before international investors who might become Kapital Bank shareholders after privatization. Kapital Bank Marketing and Strategic Development director Samira Sarifova said that the "rating agencies are interested in the issue of the privatization of the bank, but all the facts which we are about to familiarize them with prove that the state has been, and will remain, an important customer of the bank. Cooperation with the state will even be extended in the future."

Kapital Bank will continue providing banking services to important large-scale national projects through its extensive network of branches. In addition, the bank has extensive experience of servicing state projects and the state has more than once expressed its interest in continuing cooperation with Kapital Bank. At present, the bank has 87 branches, two independent departments and 97 offices which operate under the branches, as well as 12 currency exchange offices. In the future, the bank intends to broaden its activities outside Azerbaijan and to open two branches in CIS countries.

In addition, the growing number of transactions within the framework of state projects has resulted in Kapital Bank opening its own processing centre. The project will cost 1.29 million euros. It will be carried out at the bank's own expense. The processing centre will be certified through the Visa International payment system. In the initial stage, the processing centre will work with Kapital Bank's cards, but other banks might be given access in the future.

The capacity of Kapital Bank's processing facility will be 2.5 million cards and it will operate 550 ATMs, 200 information kiosks and 5,000 POS terminals. So far, the bank has issued 1.372 million cards and operates 230 ATMs.

In other words, the bank has many plans and the new owners will be happy to implement them. And this means that the quality of service at the Azerbaijani bank with the largest service network will improve and the banking services market will become more competitive, especially in the provinces. Accordingly, other private banks, too, will endeavour to broaden their service networks in different regions of the country and improve the quality of their services, which will eventually influence the overall economic development of the country.