Brien Desilets examines the rise and transformation of one of Azerbaijan’s most successful banks, from its creation in 2002 as the Micro Finance Bank to Azerbaijan through its rebranding as today’s AccessBank. He looks at why this financial institution has attracted such widespread praise, and what challenges the future may bring.
With the full support of multilateral and bilateral agencies, including the bank’s shareholders and lenders, AccessBank of Azerbaijan has been pointed to as a shining example of a successful emerging market financial institution. Its assets have risen from just over $20 million at the end of 2005 to more than $350 million today. The number of client accounts increased from just under 7,000 at the end of 2005 to more than 100,000 today. Fitch has given the bank the highest rating of any private bank in Azerbaijan, indeed the highest possible rating for Azerbaijan, matching the country ceiling of BB+.
The bank completed its debut bond issue in February 2008. This was the first bond issue on international capital markets by an Azerbaijani company, raising $25 million. Since its opening, the bank has expanded its services to include new savings products, loans money transfer services for businesses and individuals, electronic payment cards and an ATM and POS network. It has been viewed as a success story, not only in the microfinance industry, but also in the wider arena of emerging market banking.
This article provides a comprehensive analysis of the bank, from its creation by international financial institutions (IFI) to the equity involvement of AccessHolding Microfinance AG of Germany to its financial performance through the current financial crisis to its challenges ahead.
With the full support of multilateral and bilateral agencies, including the bank’s shareholders and lenders, AccessBank of Azerbaijan has been pointed to as a shining example of a successful emerging market financial institution. Its assets have risen from just over $20 million at the end of 2005 to more than $350 million today. The number of client accounts increased from just under 7,000 at the end of 2005 to more than 100,000 today. Fitch has given the bank the highest rating of any private bank in Azerbaijan, indeed the highest possible rating for Azerbaijan, matching the country ceiling of BB+.
The bank completed its debut bond issue in February 2008. This was the first bond issue on international capital markets by an Azerbaijani company, raising $25 million. Since its opening, the bank has expanded its services to include new savings products, loans money transfer services for businesses and individuals, electronic payment cards and an ATM and POS network. It has been viewed as a success story, not only in the microfinance industry, but also in the wider arena of emerging market banking.
This article provides a comprehensive analysis of the bank, from its creation by international financial institutions (IFI) to the equity involvement of AccessHolding Microfinance AG of Germany to its financial performance through the current financial crisis to its challenges ahead.
The history of AccessBank
AccessBank was created under a joint initiative by the European Bank for Reconstruction and Development (EBRD), KFW Development Bank, International Finance Corporation (IFC), Black Sea Trade and Development Bank (BSTDB) and LFS Financial Systems (LFS). The creation of the bank can be seen as part of a wider program by these International Financial Institutions (IFI). EBRD has been involved in 18 microfinance institutions in the region in which it operates. Seventeen of these have been greenfield operations in which a bank was created from the ground up.
When embarking upon such operations, EBRD first assesses the market for suitable partners. If none can be found, it works with other IFIs to establish a bank. Recent projects include the Belarus Small Business Bank which was established in 2008, and has met with success in 2009 in spite of the financial crisis. AccessBank Tajikistan, a sister bank of the Azerbaijan bank, is expected to open its doors in the next few months. The establishment of KMB Bank in Russia in the wake of the 1998 financial crisis set a precedent for similar transactions in the region. KMB Bank was subsequently bought by Italy’s Banca Intesa and now boasts assets of more than $1 billion. Other activities in the sector include 13 banks in the Western Balkans under the ProCredit Holdings Company, as well as ProCredit in Ukraine and Xacbank in Mongolia.
In the case of Azerbaijan, EBRD conducted its feasibility study in 2001 and the Micro Finance Bank of Azerbaijan was established in October 2002. With the IFIs as shareholders, the new bank needed a management team. Through an international competitive procurement, LFS Financial Systems GmbH was chosen. LFS is a German consulting and management company specializing in microfinance. Initially, LFS supplied nearly the entire management team; now only one expatriate remains on the managerial staff. LFS also took an equity stake in the bank.
In 2006, LFS established AccessHolding Microfinance AG along with other international investors. With AccessHolding, LFS is able to expand its role beyond providing consulting services to taking equity stakes in microfinance institutions. In April 2007, AccessHolding took just under a 10% stake in AccessBank of Azerbaijan; this stake increased to a little more than 16.5% in December 2007. AccessHolding’s other investments include microfinance banks in Africa (Liberia, Madagascar, Nigeria and Tanzania) and a new project under development with EBRD – AccessBank of Tajikistan. The current shareholders of Azerbaijan’s AccessBank are EBRD (20%), IFC (20%), BSTDB (20%), KfW (20%), AccessHolding (16.53%) and LFS Financial Systems GmbH (3.47%).
The participation of AccessHolding as an equity investor led the bank to change its name from Micro Finance Bank of Azerbaijan to AccessBank. The rebranding of the bank along with the name change has attracted additional customers. As Chikako Kuno, Director of EBRD’s Small Business Finance team, reports, “Many businesses in Azerbaijan don’t think of themselves as micro or small and are not likely to approach a microfinance bank for lending. The name change helped to attract these customers.”
Technical Assistance from the European Commission and later KfW accompanied the equity investments by the IFIs. AccessBank has had a demonstration effect in Azerbaijan, showing the profitability of lending to small businesses and entrepreneurs. EBRD is now engaged with seven other banks and six nonbank financial institutions (NBFI) in Azerbaijan, providing technical assistance and loans to support microfinance.
AccessBank was ranked 11th out of the country’s 46 banks in terms of assets with two percent of total banking sector assets and was ranked 10th in terms of sector loan portfolio, with 2.3% of the sector loan portfolio at the end of 2008. Today its rank has increased to 6th in terms of both assets and loans. It is one of the few 100% foreign-owned banks in Azerbaijan. Among the leading microfinance institutions (including 12 banks and 20 NBFIs) tracked by the Azerbaijan Micro Finance Association, AccessBank held a 38% market share in 2008, up from 30% in 2007. Finca trails a distant second at 12%.
AccessBank was created under a joint initiative by the European Bank for Reconstruction and Development (EBRD), KFW Development Bank, International Finance Corporation (IFC), Black Sea Trade and Development Bank (BSTDB) and LFS Financial Systems (LFS). The creation of the bank can be seen as part of a wider program by these International Financial Institutions (IFI). EBRD has been involved in 18 microfinance institutions in the region in which it operates. Seventeen of these have been greenfield operations in which a bank was created from the ground up.
When embarking upon such operations, EBRD first assesses the market for suitable partners. If none can be found, it works with other IFIs to establish a bank. Recent projects include the Belarus Small Business Bank which was established in 2008, and has met with success in 2009 in spite of the financial crisis. AccessBank Tajikistan, a sister bank of the Azerbaijan bank, is expected to open its doors in the next few months. The establishment of KMB Bank in Russia in the wake of the 1998 financial crisis set a precedent for similar transactions in the region. KMB Bank was subsequently bought by Italy’s Banca Intesa and now boasts assets of more than $1 billion. Other activities in the sector include 13 banks in the Western Balkans under the ProCredit Holdings Company, as well as ProCredit in Ukraine and Xacbank in Mongolia.
In the case of Azerbaijan, EBRD conducted its feasibility study in 2001 and the Micro Finance Bank of Azerbaijan was established in October 2002. With the IFIs as shareholders, the new bank needed a management team. Through an international competitive procurement, LFS Financial Systems GmbH was chosen. LFS is a German consulting and management company specializing in microfinance. Initially, LFS supplied nearly the entire management team; now only one expatriate remains on the managerial staff. LFS also took an equity stake in the bank.
In 2006, LFS established AccessHolding Microfinance AG along with other international investors. With AccessHolding, LFS is able to expand its role beyond providing consulting services to taking equity stakes in microfinance institutions. In April 2007, AccessHolding took just under a 10% stake in AccessBank of Azerbaijan; this stake increased to a little more than 16.5% in December 2007. AccessHolding’s other investments include microfinance banks in Africa (Liberia, Madagascar, Nigeria and Tanzania) and a new project under development with EBRD – AccessBank of Tajikistan. The current shareholders of Azerbaijan’s AccessBank are EBRD (20%), IFC (20%), BSTDB (20%), KfW (20%), AccessHolding (16.53%) and LFS Financial Systems GmbH (3.47%).
The participation of AccessHolding as an equity investor led the bank to change its name from Micro Finance Bank of Azerbaijan to AccessBank. The rebranding of the bank along with the name change has attracted additional customers. As Chikako Kuno, Director of EBRD’s Small Business Finance team, reports, “Many businesses in Azerbaijan don’t think of themselves as micro or small and are not likely to approach a microfinance bank for lending. The name change helped to attract these customers.”
Technical Assistance from the European Commission and later KfW accompanied the equity investments by the IFIs. AccessBank has had a demonstration effect in Azerbaijan, showing the profitability of lending to small businesses and entrepreneurs. EBRD is now engaged with seven other banks and six nonbank financial institutions (NBFI) in Azerbaijan, providing technical assistance and loans to support microfinance.
AccessBank was ranked 11th out of the country’s 46 banks in terms of assets with two percent of total banking sector assets and was ranked 10th in terms of sector loan portfolio, with 2.3% of the sector loan portfolio at the end of 2008. Today its rank has increased to 6th in terms of both assets and loans. It is one of the few 100% foreign-owned banks in Azerbaijan. Among the leading microfinance institutions (including 12 banks and 20 NBFIs) tracked by the Azerbaijan Micro Finance Association, AccessBank held a 38% market share in 2008, up from 30% in 2007. Finca trails a distant second at 12%.
Macroeconomic environment
Azerbaijan is an oil-exporting country, distinguishing it from some of its neighbors in the Caucasus and Central Asia region. The economy received a major boost when the Baku-Tbilisi-Ceyhan pipeline opened in June 2006. GDP growth was higher than 35% in 2006, 24% in 2007 and 11% in 2008. Oil and gas comprised 62% of GDP in 2008, the same year in which Azerbaijan reached a $40 billion trade surplus.
High growth and the trade surplus has led to currency appreciation and inflation. The local currency, the manat, appreciated five percent against the US dollar in 2006, three percent in 2007 and five percent again in 2008. (The Azeri Manat (AZM) was replaced by the Azeri New Manat (AZN) with an exchange of 5,000:1 in 2006.) Official inflation was 16.7% in 2007 and 21% in 2008, slowing toward the end of the year as oil prices dropped.
Azerbaijan is an oil-exporting country, distinguishing it from some of its neighbors in the Caucasus and Central Asia region. The economy received a major boost when the Baku-Tbilisi-Ceyhan pipeline opened in June 2006. GDP growth was higher than 35% in 2006, 24% in 2007 and 11% in 2008. Oil and gas comprised 62% of GDP in 2008, the same year in which Azerbaijan reached a $40 billion trade surplus.
High growth and the trade surplus has led to currency appreciation and inflation. The local currency, the manat, appreciated five percent against the US dollar in 2006, three percent in 2007 and five percent again in 2008. (The Azeri Manat (AZM) was replaced by the Azeri New Manat (AZN) with an exchange of 5,000:1 in 2006.) Official inflation was 16.7% in 2007 and 21% in 2008, slowing toward the end of the year as oil prices dropped.
Azerbaijan Banking Sector
The banking sector in Azerbaijan is dominated by the International Bank of Azerbaijan (IBA) and by Kapital Bank. IBA’s share of total banking assets stood at 47% in 2006 and 39% in 2007, and then rose to 43% at the end of 2008 as a result of the global financial crisis.
At the time of AccessBank’s creation, EBRD’s strategy included increasing diversity in the banking sector to provide alternatives to the state-owned bank. At the time of its intervention, the banking sector was characterized by low capitalization and limited transparency. EBRD’s strategy also included a focus on small business and microfinance. “The loan/GDP ratio is low for the region, never mind comparisons to Western Europe or the US. There is a lot of room for financial intermediation,” says EBRD’s Kuno.
The current financial crisis has led some of Azerbaijan’s banks to halt their lending activities and many, failing to find additional funds for refinancing, have had to repay loans. The Central Bank of Azerbaijan reacted by eliminating the five percent reserve requirement on foreign borrowings, reducing the required deposit reserve from 12 to half a percent and extending loans to certain banks. In general, however, Azerbaijan has fared much better than other countries, particularly emerging markets, in the financial crisis. The table below shows some key banking sector indicators.
AccessBank’s financial performance
In general, AccessBank’s financial performance has been impressive. With the full support of multilateral and bilateral agencies, including the bank’s shareholders and lenders, AccessBank has grown in the spotlight as a shining example of a successful emerging market financial institution. Total assets grew more than 153% in 2006, 140% in 2007 and 81% in 2008. In the same years, customer deposits increased by more than 483%, 282% and 90%, respectively. The number of deposit accounts increased from 1,336 in 2005 to 28,158 in 2008. The bank’s operating expenses, however, increased by only 155% in 2006, then less than 90% in both 2007 and 2008. Shareholder equity increased by nearly 140% in 2007 and 154% in 2008.
Portfolio at risk (30 days) peaked at 0.56% in 2008. This was due to the fact that the bank had not written off any loans since 2006 and that some of its borrowers were facing financial difficulties. The key results of the bank’s performance are show in the table below.
AccessBank also provided some loan data as of end-October 2009:
- The overall average loan size is $3.600
- 95% of loans are less than $10,000 and of those, the average is less than $3,000
- 3.4% are small loans of $20,000-100,000 with an average of $40,000
- Some loans are medium-sized, but these are very few and limited.
AccessBank was rated at BB+ by Fitch Ratings. This is the highest rating for a private bank in Azerbaijan[2] and indeed the highest possible rating since it matches the country ceiling. Very few banks in Azerbaijan have ratings and, of those, most are rated B-. “This provides a lot of confidence to investors,” notes Walid Fayad, a banker with EBRD who works directly with AccessBank.
The bank completed its debut bond issue in February 2008. This was the first bond issue on international capital markets by an Azerbaijani company, raising $25 million through a Luxembourg-based Special Purpose Vehicle. In November 2008, the EBRD arranged the bank’s first syndicated loan, raising another $28 million. Since its opening, the bank has expanded its services to include new savings products, loans money transfer services for businesses and individuals, electronic payment cards and an ATM and POS network. In general, it has been viewed as a success story not only in the microfinance industry but also in the wider arena of emerging market banking.
While the bank’s performance has been impressive, there are some areas of concern. One of them is the bank’s source of funds for lending. Traditional banks receive deposits and then on-lend them to other customers, channeling money from savers to investors. AccessBank’s model is to borrow money internationally, combine it with equity from international investors (many of them lenders as well – approximately 17% of borrowings come from shareholders) then to on-lend it domestically. This is clear from the graph below. The bank’s total loan portfolio as a percentage of international borrowing plus equity increased from 81.6% in 2005 to 98.3% in 2008. Meanwhile, the ratio of lending to customer deposits has decreased from more than 26 in 2005 to 7.6 in 2008.
From a long-term sustainability perspective, it would be desirable for this last figure to continue to fall so AccessBank could become a true bank, independent of international financing and serving the fundamental banking role of channeling domestic savings into investments. “The bank currently has a deposit to loan ratio of twenty-seven percent,” notes Oksana Pak, Senior Banker with EBRD, “its sustainability requires a higher level.”
The bank has benefited from some unique events and conditions over the past few years, most importantly the opening of the Baku-Tbilisi-Ceyhan pipeline and the depreciation of the US dollar. The pipeline provided a one off (although certainly significant) boost to Azerbaijan’s GDP.
This growth has already cooled from 35% in 2006 to 11% in 2008 and is expected to cool further this year and next, to around 7.5%. The pipeline was opened at a good time for oil prices but those prices may not stay high forever and Azerbaijan’s economy is highly dependent on those prices. While the Azerbaijan manat has indeed appreciated against the US dollar, much of that can be attributed to the dollar’s decline rather than to the manat’s climb. This has provided extra comfort for AccessBank since a major share of its international borrowing is in US dollars. A falling dollar makes for easy repayment of dollar loans. A rising dollar would do just the opposite. This is again one reason for the bank to focus on increasing deposits, so it can source its liabilities in the same currency as its assets. The bank has moved to hedge its currency risk in its borrowing by sourcing two loans in the local currency – in November 2007 and August 2008. Still, it would seem that if the Azerbaijan economy were performing as well as the figures indicate, there should be sufficient depositors and savers interested in financial intermediation. The bank has also developed new products, namely term deposits, that should help to address this issue as well.
Another area for concern is the significant increase in impaired loans. These rose from approximately AZN 3.5 million in 2007 to AZN 12.0 million in 2008, or from 3.1 to 5.8% of the total loan portfolio. The bank reports that this change has come solely from accounting policy changes imposed by external auditors in response to the global crisis and is not a reflection of a deteriorating portfolio. The indication in the financial statements that these loans are fully collateralized by marketable real estate or 100% guarantees by AA rated banks does not provide much comfort with the effects of the US subprime crisis fresh in the minds of most analysts and investors. The bank should adjust its estimates of collateral coverage as real estate prices change. The financial statements indicate that these loans are not overdue or in arrears, but still this increase is significant especially considering the slowing growth of the overall economy, and given that the bank’s major increases in lending has been fueled by foreign borrowing over the past few years.
In general, term risk is not a major area for concern since most of the bank’s loans (71%) carry terms of less than one year while most of its borrowings are in the range of three to six years. Interest rate risk is also not a major issue since the bank is borrowing at rates around 10% and lending at rates around 30%. However, looking forward to 2010 AccessBank has at least $43 million in principal due on its borrowings. An additional $128 million in principal is due in subsequent years with interest payments of $20 million per year. When added to the $43 million in principal payments over the coming year, it means that total debt service in 2010 is approximately $63 million. Should the bank’s impaired loans deteriorate into portfolio at risk or worse, the bank may face cash flow challenges in 2010.
In response to this observation, AccessBank General Manager Andrew Pospielovsky noted: “We follow a very conservative liquidity and refinancing policy to ensure that we never have cash flow challenges. Today, we have over $60 million in liquid assets — fully covering all our principal and interest repayments over the next 12 months. We also have very good relations with our refinancing partners and have over $70 million in refinancing loans either signed or in process. Lastly, we now receive around $25 million in loan repayments every month – ensuring very strong cash flow. We take pride in the fact that throughout the crisis we have never stopped lending and our portfolio has grown every single month.”
“The bank needs to follow a safe trajectory and make sure internal infrastructure keeps pace with the growth of its business,” notes EBRD’s Kuno. She says that the bank has been able to maintain portfolio quality in the past, even through the financial crisis, and it needs to ensure its ability to maintain that quality moving forward.
The EBRD’s Fayad also notes the availability of qualified personnel as a challenge moving forward: “The best and brightest have been selected and put in senior management positions. As the bank grows, it needs to fill new positions in its ranks. Due to the rather limited availability of highly experienced bankers in Azerbaijan, the bank has focused on training and promoting from within.”
As far as an exit strategy for the IFIs, EBRD says is interested in exiting its investment once the bank has matured to a suitable level. An example is KMB Bank in Russia which was sold to Italy’s Banco Intesa, now has assets of more than $1 billion and continues to focus on small business lending.
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