HOW MUCH ARE SHARES UNDER THE HAMMER?

The preparations for the privatization of Azerbaijan's second largest bank are going at full speed. R+ has already touched on this subject, showing that a credit institution which has kept its head above water thanks to long-term state support has grown into Kapital Bank, which now sees the state as one of its most reliable partners. Thus, it is about time to free the bank from its status as a state-owned bank in order to ensure more dynamic development and sound competition in the market. According to a decree issued by Azerbaijani President Ilham Aliyev, "On measures to privatize the Kapital Bank open joint-stock company", the State Committee for the Management of State Property has been empowered to sell shares in the bank. In what condition will this credit institution be introduced to potential investors? We sought the answer to this question by speaking to the chairman of the board of Kapital Bank, Rauf Rzayev.

- In one of my interviews on the prospects for the development of the bank in 2004, I pointed out that the priority is to get away from manual management and turn the bank into a hi-tech organization. What does this mean? It means the introduction of high technology, the creation of a real infrastructure, the introduction of corporate management standards, high quality services for customers and so on. We completed this process in 2006, although nothing is perfect and work in this area is continuing. The environment, business conditions and even legal requirements are changing (this is clear from the appearance of new segments on the market). For this reason, as a dynamic structure, the bank should develop continuously, taking account of the requirements of the market. As for the issue of privatization, the bank was in a poor position in the past; it was almost non-competitive and was gradually losing its image and share of the banking sector. If the bank had been privatized several years ago, its market price would have been lower than the nominal price. Now the situation has radically changed, the bank has a good reputation; foreign investors are interested in it and want to have their own share in this bank. The presidential decree showed once again that the bank is almost ready for these developments. The market price of its capital has increased, although this does depend on the mood of the market, quotations and investors. But in any case, the price will be higher than its book value. If the bank works successfully on its programmes, the price will go up by 5 or 6 million and will be even more interesting to investors. The introduction of FlexCube software alone is worth a great deal! This is a world software brand with huge potential and will give the bank an even larger range of possibilities, which is what we actually hoped for. Now the bank is in the run-up to privatization and there are two stages of privatization planned, according to the decree. The first stage is when the state purveys its shares, not by putting them on sale, but by means of additional emissions that are proportional to its authorized capital and by placing them on the open market. Thus, the bank's capital doubles, while the state's share falls to 50 per cent. The second stage provides for the privatization of the remaining 50 per cent.

- What can you say about the financial indicators of the bank?

- Our assets have grown by more than 400 per cent: capital by 300 per cent and revenue generation by almost four times against August 2004 (although we could compare these figures with 1874 - for those who have forgotten about the age of our bank). We have not yet received the audit on the results of the previous year. But we have a draft according to which, in comparison with 2005, our capital increased by 4.4m manats before tax. Today the credit portfolio comprises 43 per cent of our assets. The newspaper Kommersant which provides information about 1,000 banks of the CIS has ranked our bank 371st from 1 January, while we ranked 550th in 2004. As a result of privatization, the bank will receive new money, in which we have a vested interest, which will affect our assets first of all. We will be compiling a new strategic plan for the period to 2009. There is a postulate: the better you work, the stronger you get, the stronger you get, the more people trust you.

- How good was the credit legacy that you inherited from your predecessor - United Universal Joint-Stock Bank?

- When Universal Bank was set up out of three previous banks, good assets were transferred to it. The bank started from a blank page and with good quality of assets. Tremendous crediting work was carried out. The main risk range was in assets and, believe me, we have all procedures written down. For example, if you take credits to corporate businesses within the portfolio, we do not have bad credits. If you take auto-crediting, the situation may be different. We hoped for a maximum 3 per cent loss, but it was less than that in reality. In consumer crediting, we expected 5-6 per cent, but in reality this figure was only one per cent. At a recent banking conference in Yalta, we discussed this issue as well. My colleagues were surprised at the figure we announced, because in Russia it is more than 10 per cent. We have good profitability. Of course, the most effective interest rate on credits depends on the cost of resources. In the recent period, resources have been growing, the cost is increasing, especially from private individuals, and interest rates on their deposits are increasing. We think that we provide an attractive rate for customers, because one of the banks out of which Kapital Bank was set up was the former Savings Bank. It was the leader then. In terms of attracting funds from private individuals, our task is to regain this leadership. To this end, we have set up a whole department to coordinate work in this direction.

- Does the population trust Kapital Bank?

- We live in an environment of open information. The people, who had bitter experiences of investing in financial pyramids, trust stability. Perhaps our deposit rates are 1 or 2 per cent behind the rates of other banks. In terms of liquidity, we try to keep it at a high level. Kapital Bank is one of the high-liquidity banks. We maintain the level of capital at quite a high level. Deposits are growing and we believe that this is a graphic example of the population's trust in us. In a short period of time, people have invested about 40m manats in our bank. We have growth in the corporate sector as well. At the same time, from the very beginning we aimed to keep the bank working actively on investment projects. Via investment, Kapital Bank has built two major factories in Samaxi and is implementing projects in other regions.

- What sort of rating do you hope to have this year?

- As a rule, international agencies cannot give a rating higher than a country rating. It is always considerably lower. If we are confirmed at the current level, this will mean that the bank is working and developing. Today we have ratings from two agencies - Fitch and Moody's. We have received the Fitch rating for two years and addressed Moody's only in 2006. Our Moody's rating is the same as that of the International Bank - BAA-2 on deposits in national currency and BA-2 in foreign currency. Our Fitch rating is BB - long term. Investment ratings are usually given to progressively developing countries. Azerbaijan is one of them, and our bank is also included on this scale.

- In conclusion, what can you say about the current state of Azerbaijan's banking system and what sort of competition is there on the market for Kapital Bank?

- Kapital Bank is quite competitive today. More than 700 corporate clients have come to us in the last two years, which is a good indicator. Capitalism means development in market conditions. The presence of 44 banks on the Azerbaijani market shows that the conditions created in our country allow the financial sector to develop at full speed. But at the same time, the economy is developing more rapidly than the banking sector. The economy is ahead, which creates an imbalance, since banks are not in a position to fully support it. How does this manifest itself? It manifests itself in the lack of capital. There are large companies on the market where capitalization has reached 100-200m dollars. For them to get 10-15m dollars is not a big deal, but a bank is not able to allocate such an amount of money, because it violates the limit. The fact that some banks are inclined to increase their authorized capital means that this process is natural. This is the requirement of time to provide high quality services for the economy.

As for us, it is quite notable that, as a founder, the state took a very wise step but did not resort to privatization with the aim of sale - this was put on the back burner. The priority was privatization in order to capitalize and strengthen the bank further. There is a view that it is necessary to offer some of the lots to private people rather than to corporate clients. This is also a progressive decision. In this case, the population itself becomes a co-owner of the bank - it is one thing to invest money and another to take a direct role in the banking process. A sense of ownership and responsibility emerges.