Azerbaijan, Baku, May 6 / Trend /
Standard & Poor's Ratings Services said today it assigned its 'B+/B' long- and short-term counterparty credit ratings to Kazakhstan-based JSC SB Alfa-Bank. The outlook is stable. We also affirmed our 'kzBBB' local scale rating on the bank, Standard & Poor's Ratings Services said today.
The ratings reflect our 'bb-' anchor for a bank operating primarily in Kazakhstan, as well as ABK's' "moderate" business position, capital and earnings, and risk position, "average" funding and "adequate" liquidity, as our criteria define these terms. The stand-alone credit profile (SACP) is 'b'. The long-term rating factors in one notch of uplift above the SACP to reflect ABK's moderately strategic importance to its parent, Russia-based Alfa banking group (main operating entity Alfa-Bank OJSC) and the likelihood of extraordinary parental support, the statement said.
The ratings on ABK also reflect strengths in the form of good asset quality indicators, absence of reliance on wholesale funding, and an ample liquidity cushion. Among its weaknesses are its aggressive loan growth strategy and small domestic customer franchise concentrated in corporate banking.
Our assessment of ABK's business position as moderate reflects our view of its small domestic franchise concentrated in corporate banking, and execution risk related to its fast growth strategy. Nevertheless, we recognize that ABK benefits from the operational, managerial, product, and funding support it receives from Alfa-Bank, and its parent's strong brand name. These elements clearly support ABK's' customer franchise and business stability, the statement said.
ABK is the sixteenth largest bank among 38 commercial banks operating in Kazakhstan with a market share of about 1% by assets totaling Kazakh tenge (KZT)131 billion ($870 million) at year-end 2012. We consider as risky the bank's' planned aggressive loan growth with average annual growth rates of about 50%, higher than the system average. ABK wants to further diversify its business by developing higher margin consumer lending. We believe, however, that Alfa Bank's expertise could help ABK in retail business development, although competition in this segment in Kazakhstan remains high.
Our assessment of the bank's capital and earnings as moderate reflects a gradual decline of its capital position from solid levels because of strong asset growth not matched by similar growth in retained earnings. We expect a gradual weakening of our risk-adjusted capital (RAC) ratio before adjustments to about 6.0%-6.5% over the next 18-24 months. Our projection incorporates higher-than-system-average loan growth with annual average growth rates of about 50%, capital injection of $40 million in 2014, and planned dividends payouts of around $1 million annually.
"We assess earning capacity as adequate," the statement said. "The bank remained profitable during the last financial crisis in Kazakhstan despite a large increase in provision in 2009. Its interest margin exceeded 5% in 2012 and fees and commission are growing steadily, providing a good buffer against credit losses. We expect ABK's net interest margins to increase as the bank develops higher marginal retail business operations. Its below 40% cost-to-income ratio might slightly deteriorate due to business expansion plans, while remaining adequate."
The stable outlook reflects our view that ABK will be able to adequately manage the rapid growth of its franchise, while maintaining moderate capitalization and adequate liquidity in the next 12 months. It also assumes availability of continued operational, managerial, and financial support from parent.
"We might consider a negative rating action if the bank's rapid growth strategy led to a significant increase in credit losses or eroded its capital base," the statement said. "A substantial weakening of the bank's links with and support from Alfa Group would trigger a review of its moderately strategic importance and could lead to a negative rating action."
"We might consider a positive rating action if the bank significantly improved its competitive position in the local market by gaining greater pricing power, business diversity and growth without impairing asset quality," the statement said. "We might also consider an upgrade if we saw a substantial improvement in the bank's capital position, with our projected RAC ratio before adjustments exceeding 10% either through a decrease in lending growth or additional capital increases."