"The RWP on IBA's support-driven IDRs reflects the financial rehabilitation of the bank announced by the authorities in July, and subsequent clarifications made by the bank's management to Fitch, that this will involve a substantial buy-out of problem assets at book value by end-2015.

"In Fitch's view, this would represent tangible sovereign support for IBA and a material enhancement of the support track record, potentially resulting in a positive change in our view of the sovereign's propensity to provide support. If the clean-up is completed as planned, Fitch is likely to revise IBA's Support Rating Floor up to 'BB+' and upgrade the bank's support-driven Long-term IDR and senior debt rating by one notch to the same level.

"The balance sheet clean-up has been initiated in part to prepare IBA for privatisation. However, according to management, the preparation period for the privatisation may be as long as five years, meaning that the bank is likely to remain state-owned for at least the medium term.

"Furthermore, Fitch believes that even if privatisation takes place, IBA will remain systemically important as the largest bank in the country and will retain significant business with state-controlled entities. We do not therefore expect significant downside pressure on IBA's support-driven ratings because of the planned privatisation, although combined with the uneven support rack record, it will continue to justify at least a one-notch differential between the bank's ratings and those of the Azerbaijan sovereign (BBB-/Stable).

"IBA's support-driven ratings continue to reflect potential support for the bank, if needed, from the Azerbaijan authorities. This view factors in (i) IBA's high systemic importance, stemming from its large domestic franchise (the bank accounts for 35% of sector assets) and substantial funding from state-owned corporations (AZN1.5bn or 15% of end-2014 liabilities); (ii) the bank's majority (51.07%) state ownership; (iii) IBA's fairly small size relative to the sovereign's available resources (assets and equity equal to 15% and 1%, respectively, of GDP at end-2014); and (iv) the potentially significant reputational damage for the authorities in case of IBA's default."