S&P lowered credit ratings on Kazakh Kazkommertsbank

Azerbaijan, Baku, Sep. 23 / Trend E. Kosolapova/

Standard & Poor's Ratings Services lowered its long- and short-term counterparty credit ratings on Kazakhstan-based Kazkommertsbank JSC to 'B/C' from 'B+/B'. The outlook is stable, the agency reported on Monday.

Kazakhstan national scale rating on the bank was lowered to 'kzBB+' from 'kzBBB-'.

Finally, S&P lowered its rating on the bank's dated subordinated debt instruments to 'CCC+' from 'B-', and affirmed rating on its junior subordinated instruments at 'CCC-'.

"The downgrade reflects continuing pressure on Kazkommertsbank's capitalization, driven by poor asset recovery dynamics and weak revenue generation. It also reflects our view that the bank's current level of provisioning is likely inadequate--not sufficient to cover any further
deterioration of the loan portfolio--despite provisioning increase in 2012," the agency said.

S&P reflected its view of these potential unprovisioned embedded losses, and the possibility that the bank will likely continue to take a long-term approach to the workout of these assets, by adjusting its assessment of the bank's risk position to "weak" from "moderate."

According to the agency, Kazkommertsbank's portfolio quality has deteriorated significantly since the bursting of the real estate bubble in late 2008 and the slowing of the economy
afterwards. Loans overdue 90 days and more accounted for 26.8 percent of the bank's
total loans as of June 30, 2013, in line with the Kazakh banking sector average. Also, nonperforming loan (NPL) stock constantly increased between the end of 2009 and June 30, 2013, and so far we see no signs of this trend reversing. In addition, the bank reports that restructured loans account for a further 20 percent of total loans. In S&P view, a significant share of these restructured loans are nonperforming, making the bank's actual NPL figure
closer to 35-40 percent of the total portfolio.

S&P continues to regard the bank as "highly systemic" in Kazakhstan, and to see
the government as "supportive" of its banking system.

"As a result, we factor in two notches for potential government support into the long-term rating on the bank. For banks in Kazkhstan, we continue to assume govermnment support would extend to dated subordinated debt, and so we notch the bank's instruments from the 'b' group credit profile, rather than the bank's 'ccc+' stand-alone credit profile," S&P said.

The stable outlook reflects S&P expectation that Kazkommertsbank's creditworthiness will remain little changed over the coming year, with modest volumes of new business, a high and still slowly rising stock of distressed assets, no significant change in provisioning policy, and fairly weak capital generation.

S&P might consider a negative rating action if the agency observed further substantial deterioration of the bank's asset quality, leading to a need to create significant new reserves.

The possibility of positive rating action is remote at this time.

"We might consider a positive rating action if we observed that the bank was comprehensively addressing the provisioning and workout of its troubled assets, particularly if it received additional capital to support such an exercise," S&P said.