The state-run banks in Azerbaijan will be more probably privatized. Indeed, it will not occur immediately and simultaneously. The Government of Azerbaijan has established future plans for the privatization of one of two bog state-run banks- Kapital Bank
P.S. Kapital Bank, a heir of the Savings Bank, with a 131-year old history in the banking sector, was established at the decree of the Cabinet of Ministers in the form of unified joint stock company as a result of merger of 3 state-run banks. At resent Kapital Bank holds 100%-stock of Kapital Bank in the face of the Ministry of Finances of Azerbaijan
It was the International Monetary Fund (IMF) which has a long insisted on the privatization of state-run banks as one of major condition for structural reforms in the country. Respectively, on 1 March 2005 the President of Azerbaijan signed a decree on Additional Measures linked with deepening the progress on fiscalbanking system of the Republic of Azerbaijan, directed at deepening of modern market relationships in the country's financial banking sector, increase of rivalry in the banking system and attraction of investments to the state economy.
The privatization of Kapital Bank is planned in two stages. The first stage of privatization of the bank is scheduled for December 2006 January 2007 and targets doubling the sum of statutory capital at the expense of additional issue so that to cut the state participation in the bank to 50%. In this respect a new emission will be issued in the amount of 12mln manats. The resolution on the cut in state share in Kapital Bank was adopted in the October meeting of the Bank's shareholders. The meeting approved a proposal by the State Commission on the privatization of the state-run banks, formed of the representatives of the state-run banks, the State Committee on State Property Management, the Ministry of Finances and the Ministry of Economic Development, on the doubling of the bank's capital. The Deputy Chairman of the Managing Board of Kapital Bank, Yashar Mammadov, said that the doubling of the statutory capital of Kapital Bank can be the commencement of the first phase of privatization. At present the statutory capital of the Bank constitutes 12mln manats, while the aggregate capital is 24mln manats.
In the second stage it is planned to sell the rest 50% of the state package and respectively, carry out work with potential investors. In this connection, the 2007 public budget of Kapital Bank does not include funds for expansion of its capital. Notably, the date of commencement of the second stage of privatization is not indicated.
At present the commission is developing a scheme of privatization, as well as net cost of one share. At present it is set in the amount of 200,000 manats. However, this sum of net cost is too high for physical entities and it can be decreased for them, but increased for legal entities. These issues are currently being made concrete.
The state-run share in the Kapital Bank can be implemented by parts and respectively, the price will be determined at the moment of implementation of every of them through conduct of audit of bank's activities. At present the estimation of the market price of the bank is carried out so that the State Commission on Privatization of Banks could conclude a contract with the international auditor company Ernst & Young.
Within the framework of pre-privatization preparations last year Kapital Bank held re-estimation of major funds of the Bank and it resulted in 6-fold rise in the Bank's capital over 1.5 years.
Then Moscow group of PriceWaterhouseCoopers, an international company, carried out the estimation of the bank n the period as of 1 January 2006. The approximate cost of the bank's shares ranged from $35mln to $40mln for their sale in the second state of privatization. But it is not the limitation. As of result of 2006 the Bank's dividends to the government are expected to comprise 1mln manats, whereas as of 2005 the figure was only 800 manats. Respectively, this year the bank will earn 4 times more and it should affect on the results of the Bank's estimations by Ernst & Young.
The rating awarded by the international rating agencies undoubtedly affects the cost of the Bank. Thus, by the end of 2006 Kapital Bank expects to get the second rating from international rating agency Moody's Investor Services, which has signed relevant contract for 1 years. The issue of the second rating is linked with the will to compare the results with estimation by another rating agency Fitch Ratings, which carried out the evaluation of the Bank in the period as of 1 July 2005. In accordance with the estimation, obtained in November 2005 from Fitch Ratings, Kapital Bank was awarded a long-tem rating "B+", short-term - "B", individual - "D/E" and support rating - "4". The forecast on long-term rating - "Stable". On 16 November 2006 Fitch Ratings confirmed the rating of the bank in the last year level.
P.S. Issuer De-fault Rating (IDR), short-term rating and support rating of Kapital Bank reflects an idea by Fitch on restricted probability for gaining support, if needed, from an only shareholder of the Bank, the Ministry of Finances.
However, such results of estimation were beyond the expectation of the bank's management. The current bank cannot be compared with the last year's. We have become stronger and more mobile and expected higher rating due to positive qualitative strengthening. The bank also expected rise in individual rating from D/E, which did not occur as well, the Chairman of the Managing Board of Kapital Bank, Rzayev said.
Respectively, the bank enters new markets and the privatization should be helpful in this respect. The management of the Bank welcomes the wise and gradual privatization of state-run banks, while private bankers are not happy with the plans on denationalization of banks. The rivalry is always distorted, when the state company competes with the private one. The state-run banks can undertake the risks, which the private banks cannot. Moreover, the state-run banks do not take a resolution on crediting the market conditions and support unequal conditions for private banks. Thus, Kapital Bank was one of three leading banks of Azerbaijan, though it held only around 4% of assets of the banking sector.
Entrance of Kapital Bank to the stock market will make it transparent and reasonable for new investors and shareholders. Perhaps, the European Bank for Reconstruction and Development (EBRD) or another foreign bank will claim at one of places among shareholders of Kapital Bank. In accordance with the world experience, over half banking assets in many countries, including Poland, Czech Republic, Hungary, Bulgaria, Estonia, Lithuania, turned out under the control of foreign banks namely within the process of privatization. It is not secret that opening their representations the foreign banks bring new technologies, new products, new ideas and professionals, which Azerbaijani market needs.
Thus, the government is ready to release from its control only the shares of Kapitalbank. It will develop by stages and more scarcely, the government will keep the control over the bank in the medium-term perspective. Nevertheless, the privatization of state-run banks has been launched in Azerbaijan. If the plans are implemented, the Azerbaijani banking system will be brought closer to world standards and the IMF's recommendations will be implemented.