My comment on investing with International Bank of Azerbaijan.

The most common question asked to me, is how safe do I REALLY think placing a substantial amount of one's wealth with International Bank of Azerbaijan is. What are the risks that are not enumerated anywhere...

For example:

1. How good is IBA, how risky is it, what could possibly go wrong? How could I lose my money, is the only way to lose money is the bank closing down in full, or is there other ways, default but reopening, just not paying at all, anything?. Moody's, Fitch, S&P, all their comments are medium in simple terms right? Would you personally deposit large sums of money into Azerbaijan banks?

My honest reply is:-

There are two risks with a bank like IBA:
o Individual credit risk - default due to bankruptcy.
Unless the economy totally collapses this is most unlikely. As the Azerbaijan economy is almost exclusively based on oil and gas this is inconceivable. The bank is very well managed, with loans issued on a financial basis, not “to those well connected”. Its loan portfolio well diversified to various industries i.e. construction, manufacturing, trade, consumer consumption, utility development, infrastructure, etc. It’s the National Development bank of the country, which means its main aim is to provide loans which will develop the country’s economy according to the Governments strategy.

Even if the bank makes some bad decisions regarding loans which impair its capital requirements, the international credit rating companies all acknowledge that the State would assist. The State obviously has the financial muscle to assist as it has $25 billion foreign reserves and banks total liabilities are a fraction of that. Throughout history everywhere in the world, the State always assists a National Development bank it controls because if that bank had to collapse, then the entire banking system would collapse. The bank currently has capital tier ratio approximately double the international normal banking requirements, meaning it is financially very strong.

High interest deposit rates in IBA’s case is not due to its frantic requirement for assets. It’s just in Azerbaijan since the Soviet days, high loan rates have remained, and therefore the bank can afford to offer high savings rates.

IBA’s speculative grade rating is due to the ceiling of its Sovereign rating. It’s just defined that no company can be higher than its Sovereign country rating.

o Sovereign risk - prevention of foreign debt repayment by State
It costs Azerbaijan $15 per barrel to extract oil. Anything above that will grow the economy. Even this year when oil collapsed to $30, its economy grew by 4%. Normal growth in past 5 years has been 30% per annum and I expect it to grow by double digits again in the near future. Even if war had to break out with Armenia the conflict would be limited to the outlying territory of conflict, just as in 1992. Political tension is the sole reason for its credit rating grade being one notch below investment grade. With $25 billion foreign reserves and virtually no outstanding bonds, the country can withstand turbulence.
See this report.




RISK REWARD PROFILE

The interest rate of 13% -16% p.a. is a unique arbitrage opportunity which may not be around for long. Russia banks used to offer 11%- 12% for USD deposits in 2001, now they offer rates at 3% - 5%. IBA support of the bank just adds value. Its economy is based on a better commodity than minerals (or property like Dubai!) I am very comfortable to recommend substantial portion of ones assets in Azerbaijan due to its risk-reward profile.