TEST FOR BANKRUPTOVIRUS

Amidst the fight with the global COVID-19 pandemic, the Central Bank of Azerbaijan (CBA) decided to conduct its own ‘stress test’ to assess the stability of the country's banking market. As a result, four ‘infected’ banks were immediately identified, including Atabank, AGBank, NBCBank and Amrahbank. However, since it was impossible to ‘cure’ them, the regulator resolved the problem in categorically by revoking the licenses of all the four. Thus, the number of banks operating in Azerbaijan decreased to 26.

Atabank and Amrahbank

In fact, the fate of one of the four closed banks, Atabank, was decided upon long before the pandemic. At the first press conference after CBA took over the supervision of the banking sector, CBA CEO Elman Rustamov announced the hopelessness of the situation in this bank. He noted that Atabank did not carry out the necessary risk management, which further deteriorated its position. At the beginning of 2020, the management of the bank was recommended to personally contact each depositor who did not insure their deposit and inform them that they can do this in the near future.

In other words, Mr. Rustamov quite openly stated that the closure of this bank is a matter of time. It was necessary to wait for the approval by the President of Azerbaijan Ilham Aliyev of the extension of the system of full deposit insurance for another nine months - until December 4, 2020.

A new presidential decree issued on April 25 covers a total of ₼7.3 billion of the deposits of the population, thus protecting the interests of 8.3 million people, including depositors of the now closed banks.

Two days later, CBA issued a statement that provisional administration was introduced in four banks, followed by another statement on the cancellation of the licenses issued for Atabank OJSC and Amrahbank OJSC effective April 28. “CBA conducted a comprehensive audit in both credit institutions, which revealed serious financial losses. These banks lost all their capital and are bankrupt,” CBA statement said.

The most important drawback of these banks was capitalization. Atabank’s capital was minus ₼214 million. So, against the minimum standard set by CBA at ₼50 million, the bank needed an extra capitalization of ₼264 million. Amrahbank's capital was ₼77 million but to fulfil the CBA conditions, it needed ₼127 million. In addition, the banks had problem loans so much that their share in Atabank reached 88% for the banking system of Azerbaijan and 40% - in Amrahbank.

According to Rustamov, the banks were offered opportunities for additional financing, but they did not agree with this. “CBA is not interested in closing any bank. The issue was discussed at the Financial Stability Board, and an appropriate decision was made, since the rehabilitation of these two banks was impossible,” Rustamov said.

Thus, on April 30, 2020, the Baku Court of Appeals declared Atabank and Amrahbank bankrupt and launched the bankruptcy procedure. The Azerbaijan Deposit Insurance Fund (ADIF) has been appointed the liquidator of both banks.

AGBank and NBCBank

A similar situation was with the other two banks, AGBank and NBCBank. CBA adopted a decision to revoke their licenses on May 12. Elman Rustamov explained such a long pause with a need to clarify some points. “But I must say that the situation in the banks is not well either, although both banks have been operating for many years. They are responsible for the existing situation,” Rustamov said.

Indeed, these banks were founded at the dawn of Azerbaijan’s independence, in 1992. Despite all problems, AGBank, for some reason, continued to be one of the top 15 banks of Azerbaijan until recently. Although the bad situation in this bank has been repeatedly mentioned over the past few years, the bank management somehow managed to convince the regulators that appropriate measures would be taken to restore it. To no avail...

“According to our inspections, the share of non-working loans in AGBank reached 51% of the total portfolio as of April 30, 2020. After correction in reserves, we found out that the negative value of total capital is ₼167 million. To restore the capital position required by law (₼50 million), the bank needed an additional ₼217 million,” CBA statement said. Moreover, the lack of capitalization was noted in the report of the foreign auditor as well.

“There are discussions around the situation with AGBank, but today I want to make one fact public. In 2016, CBA helped the bank to stay on the market. After that, we expected it to take some measures for recovery, but this did not happen. And it is surprising that some experts are trying to present the facts about this bank in a distorted form,” Rustamov said during a press conference held on May 13.

Anyway, AGBank was the largest among the closed banks and differed from the other three in that it was mainly corporate. Atabank, NBCBank and to a certain extent Amrahbank were closed to the market and tied to the business of their owners - such a banking model was popular in Azerbaijan in the past and was based on the principle of serving one large holding or business. “Deposits received from the population flew into this business and disappeared. They pursued a very risky credit policy. Projects were financed by people with great ambitions unaware of the consequences of their acts. Even the large objects were acquired outside their banking profile. Ultimately, the bailout measures do not bring benefits. There are such problems as poor quality management, lack of risk management in these banks,” Rustamov noted.

However, such small players began to leave the market gradually, since an excessive number of banks in the country greatly damaged the overall quality of the market and created many problems for the regulator and the government.

Like other banks, NBCBank had a problem of non-working loans (54% of the bank's loan portfolio, excluding mortgage loans issued through the funds of the Azerbaijan Mortgage and Credit Guarantee Fund. At the same time, the negative value of total capital reached ₼24 million, i.e. the bank needs additional capital of ₼74 million.

Moreover, the regulator announced the facts of regular violation of reporting procedures by the bank.

Nothing personal, just business

By the way, it was the last problem that caused some bewilderment among the public - in social networks there were quite “decent” statistical data from banks that could not have caused their bankruptcy. However, experts note that there is a problem of reporting distortion in the banking system, and most likely, liquidated banks skillfully manipulated some numbers to hide the real picture from customers. Did this four only sin with this? According to the CBA, “today we no longer see any problems on this score”, but monitoring is carried out periodically in banks, and, as E. Rustamov said, “the regulator will fight hard with such facts.”

In addition to distorted reports, some weak banks attempted to attract deposits at high interest rates. Unfortunately, this often happens secretly. As a result, people with a low level of financial literacy buy the bank products but when their expectations fail, start looking for the responsible.

As noted above, deposits in Azerbaijan are insured, ADIF is in effect, and all this was done to increase public confidence in the banking system.

Again, a very effective step was taken to mitigate the blow to the image of the banking sector and the degree of confidence. By the decision of the ADIF Board of Trustees, the maximum rate on deposits in national currency covered by insurance has been increased from June 1 to 12% from the current 10%. Moreover, for deposits in foreign currency, the maximum rate falling under the insurance system will be 2.5% annually. Thus, sustainable banks will have the opportunity to offer customers more profitable deposit products.

By the way, insured deposits in four liquidated banks will also be returned, and the process will begin in the near future. CBA reported that the total amount of these deposits, covering 215K depositors, is ₼686 million. This is over 99% of the total deposits in liquidated banks. As for the deposits of legal entities, according to the law, their return is possible only after the sale of bank assets and payment of all their obligations.

Is it expensive to pay such an amount? Of course, after all, the responsibility for the investors of these four banks lies with the remaining 26, which remain on the market. But in any case, this is better than having such “abscesses” in the system, the regulator believes. “The problem banks are not even systematically significant for the state to save them. Their market share is less than 1% individually (3% in total), and all of them are private banks. The state can only be held responsible for a state bank and only if it has a large state share. These are the legislation and traditions,” Rustamov believes.

Only 3-4%

Despite all these problems with liquidations and bankruptcies, the financial system of Azerbaijan remains stable. “Yes, there are problem banks, but their market share is negligible and amounts to 3-4%. This is not a new problem, we knew about it,” Rustamov noted.

In other words, it means that the closure of these banks during a pandemic was just a coincidence. Moreover, CBA did not benefit from the pandemic, since it is much more difficult to take such a step during the period of general economic decline and social sensitivity than in good times. Had these ‘sick’ banks remain active, the consequences for the entire banking system of the country would be much greater. “Toxic assets and weak banks pose risks to the financial and banking system, especially in the complex macroeconomic environment as we have now globally. In addition, this is a strong social blow as far as the depositors are concerned. Therefore, we solve these accumulated problems,” Rustamov noted.

So the problem seems to have nothing to do with the regulator’s attitude towards any of these banks, despite what numerous media outlets and employees of liquidated banks claim. The main goal is to create a financial system that could be trusted by the population, business, and foreign investors. “These measures will improve the position of the banking sector in general. Today, our capital adequacy ratio exceeds 20%, while the norm is 10%. In general, the situation is dynamic, and we make constant assessments of the situation in the banking sector,” Rustamov said.

Yet the market participants themselves - its ‘weak links’ - could be the first to take the initiative and find a way to stay on the market. It can be either consolidation and merger, or attracting new investors to increase capitalization. In this case it is clear that saving the drowning banks is up to them.