Azerbaijan, Baku, Oct. 3 / Trend E. Kosolapova/
Moody's Investors Service downgraded the following ratings of Kazakh Alliance Bank: long-term local and foreign-currency deposit ratings to Caa2 from B3; local and foreign-currency senior unsecured debt rating to Ca from Caa2; and local-currency subordinated debt rating to C from Caa3. Concurrently, Moody's affirmed the bank's E standalone bank financial strength rating (BFSR) and lowered the corresponding baseline credit assessment (BCA) to ca from caa2. The rating agency also affirmed the bank's Not Prime short-term foreign-currency deposit rating.
The outlook on the deposit and senior unsecured debt ratings was changed to developing from negative, while BFSR and subordinated debt ratings carry a stable outlook.
"The downgrade of Alliance Bank's ratings was driven by deterioration of the bank's credit profile, in particular its loss absorption capacity and liquidity," Moody's said.
These facts are reflected in marginal capital adequacy with an equity-to-assets ratio of 1.54 percent as of end of the first half of 2013, slightly down from 1.89 percent at year-end 2012; weak profitability with marginally positive net interest income and a low, albeit rising, level of fee income that barely covers Alliance Bank's operating costs; highly impaired loan portfolio, with problem loans (defined as 90+ days overdue loans and impaired corporate loans) of around 49 percent of gross loans at end of the first half of 2013. Moreover the bank's financial strength and its franchise perspectives are further challenged by its weak liquidity profile as reflected in its reliance on short-term funding and a low cushion of liquid assets (excluding pledged assets) that accounted for only 9.1 percent of its total assets as of end of the first half of 2013, down from 15.7 percent as of end of the first half of 2012.
Moody's incorporates a moderate systemic support assumption into Alliance Bank's deposit ratings due to the bank's government ownership and the support that has been provided to the bank by the government and state-controlled entities. As a result, Alliance Bank's Caa2 deposit ratings receive two-notches of uplift from its ca BCA.
Moody's understands that Alliance Bank may be privatised (current target is year-end 2013), as instructed by Kazakhstan's President Nazarbayev in early February 2013. The developing outlook on the bank's deposit and senior unsecured debt ratings, which indicates that these rating could either be downgraded or upgraded over the next 12 to 18 months, reflect the high degree of uncertainty about the bank's ability to meet its obligations to depositors and bondholders.
Alliance Bank's ratings could be upgraded if the bank is recapitalised by its current shareholders or following a privatisation. Evidence of a substantially stronger liquidity profile could also have upward rating implications.
Alliance Bank's ratings could be further downgraded in the event of a default on its obligations.