Baku, Azerbaijan, Oct. 14
By Elena Kosolapova - Trend:
Standard & Poor's Ratings Services placed its 'B' long-term issuer credit rating on Kazakhstan-based Kazkommertsbank (KKB) on CreditWatch with negative implications, the rating agency reported on Oct. 14. S&P also affirmed the short-term rating at 'C'.
At the same time, the agency lowered its national scale rating on the bank to 'kzBB' from 'kzBB+' and its rating on its subordinated debt to 'CCC' from 'CCC+'. S&P placed both ratings on CreditWatch with negative implications.
"The CreditWatch placement reflects our view that KKB's capitalization on a consolidated basis has weakened following its acquisition of 46.5 percent of Kazakhstan-based BTA Bank and the subsequent buyback of shares in both banks," the rating agency said.
The buyback amount totaled 54.8 billion Kazakhstani tenge ($304 million), or 11.8 percent of KKB's capital on a consolidated basis as of June 30, 2014. S&P believes that the bank's capital will likely remain weak given the weak earnings generation of both KKB and BTA.
As of June 30, the agency's risk-adjusted capital (RAC) ratio for KKB on a consolidated basis was 5 percent before adjustments for diversification. S&P projects that this ratio will be in the range of 4.5-4.8 percent over the next 12-24 months, incorporating the impact of the share buyback program, and assuming no significant growth of earning assets of the bank and no meaningful relief materializing for its large problem loan portfolio.
The agency also expects the bank's profitability to remain low in the coming two years, largely due to the significant amount of problem assets at BTA and KKB (63 percent of the total loan book of two banks combined) and low new business generation.
"We believe that it will be extremely challenging for KKB to achieve meaningful problem asset recovery at BTA and KKB without material government support. Our understanding is that, given the significant market share of the combined bank in the banking sector of Kazakhstan (about 40 percent of total loans in the banking sector and over 70 percent of total assets overdue more than 90 days), the government might be willing to provide some support," the agency said.
One of the plans under discussion is the involvement of the state-controlled Problem Asset Fund (PAF) in recovery of problem assets of BTA and KKB. In principle, this may enable KKB and BTA to clean up their balance sheet, supporting the banks' capitalization. When S&P has clarity on this, it will reassess the potential impact on KKB's capital position.
The agency will resolve the CreditWatch once it has information regarding the possibility of Kazakhstan government providing support for the working-out of problem assets at KKB and BTA, taking into account any other developments that might change the assessment of the capital of the consolidated bank. S&P expects to have more clarity on these issues toward the end of 2014.
"We could lower the ratings if KKB does not receive sufficient capital relief to cause our forecast RAC ratio to rise above 5 percent. A downgrade would become more likely if we observe a further deterioration in the quality of the loan portfolio, weakening the capital position," the agency said.