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Fitch Ratings may downgrade Azeri banksâ€™ bond issues

24 February 2009 10:25 (UTC +04:00)

Baku. Vugar Israfilov â€“ APA-Economics. Fitch Ratings says depositor preference limits recovery prospects for bondholders in case of a bankâ€™s insolvency, while banksâ€™ corporate governance and risk profiles can also have a major impact on recoveries. Depositor preference refers to the priority of claims of (usually retail, but sometimes also corporate and bank) depositors over other senior unsecured creditors in case of a bankâ€™s insolvency.
In a special report published today, Fitch says that although depositor preference exists in some form in each of the eight CIS countries where the agency has assigned bank ratings - Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Russia, Ukraine and Uzbekistan - there are important differences in the priorities of claims across countries. Fitch considers depositor preference strong in Russia, Ukraine and Kazakhstan, where both uninsured retail depositors and the deposit insurance fund (which assumes claims of compensated depositors) rank senior to bondholders. Depositor preference takes a softer form in Armenia, Azerbaijan and Uzbekistan, where either the fund or uninsured depositors (but not both) have priority. Subordination seems to be weakest in Belarus, but could become significant if the deposit insurance fund is unable to compensate all depositors. In Georgia, the statutorily mandated complex waterfall of priorities can, in practice, create significant subordination for bondholders.
Retail funding accounts for between 21% and 30% of banking sector liabilities in six of the CIS countries reviewed. The proportion is significantly lower in Kazakhstan (14%) and Uzbekistan (13%), reflecting those countriesâ€™ reliance on foreign funding and corporate/interbank deposits, respectively. Bringing together legal provisions and sector liability structures, Fitch estimates that holders of senior unsecured bonds are, on average, most highly subordinated in Uzbekistan (33%), followed by Georgia (30%), Ukraine (27%) and Russia (24%). Subordination of senior bondholders is notably lower in Azerbaijan (18%), Kazakhstan (14%) and Armenia (9%). Subordination is potentially absent in Belarus, but this depends on the ability of the deposit insurance fund to compensate depositors. At the same time, actual degrees of subordination could differ significantly across banks within a single country.
"Insolvencies of mostly small banks, in particular in Russia, suggest low or zero recoveries for senior unsecured creditors," says Vladimir Markelov, Director in Fitchâ€™s Financial Institutions group in Moscow. "However, recovery prospects at rated banks should generally be better due to somewhat improved corporate governance, better managed risk profiles and greater likelihood that state authorities will actively manage rehabilitation or insolvency procedures."
"The most recent cases of failures of mid-sized banks in Russia have usually not resulted in creditors suffering material losses, as the banks have been taken over by state-related entities, thus averting the need for insolvency proceedings," says James Watson, Managing Director in Fitchâ€™s Financial Institutions group. "However, in case of wider system stresses it will be harder for CIS authorities to effectively manage the rehabilitation or insolvency proceedings of all significant failed banks."
To date, the subordination caused by depositor preference in these countries has not led Fitch to notch downwards the ratings of banksâ€™ senior unsecured debt from their Long-term Issuer Default Ratings (IDRs). In the future, though, banks across the region with higher levels of retail or related-party funding, and Uzbek and Georgian banks in general, would be most at risk of such notching.
Azerbaijanâ€™s active corporate bond issuing banks are International Bank of Azerbaijan, Technikabank, Parabank, Bank Standard, Bank Respublika, AGBank, Atrabank, Rabitabank, Accessbank and Mughan Bank. Their total bond portfolio reached $277.42 million.