Kazkommertsbank to have difficulty in problem asset recovery without government support - S&P

Kazkommertsbank to have difficulty in problem asset recovery without government support - S&P

Baku, Azerbaijan, July 7

By Elena Kosolapova - Trend:

Standard & Poor's Ratings Services kept on CreditWatch with negative implications its 'B' long-term issuer credit rating on Kazakhstan-based Kazkommertsbank JSC (KKB).

"We also kept on CreditWatch negative our 'kzBB' national scale rating on KKB and our 'CCC' rating on its subordinated debt," S&P said July 7.

"We placed our ratings on KKB and its debt on CreditWatch negative on Oct. 13, 2014 because, in our view, KKB's consolidated capitalization had weakened following its acquisition of Kazakhstan-based BTA Bank," the statement said. "We expect KKB's capital to remain under pressure given its weak earnings generation and the burden of overwhelming levels of nonperforming assets at both KKB and BTA (over 60% for KKB and BTA combined) as of March 31, 2015."

In our view, it will be extremely difficult for KKB's management to achieve meaningful problem asset recovery at KKB without material government support. We understand that because KKB has a significant market share in the banking sector, the government is willing to facilitate the cleanup exercise by providing support through Distressed Assets Fund JSC (DAF) that was set up and provided with funding by the government with the aim of supporting the clean-up exercise in the banking sector.

"We previously expected government support to KKB to take the form of transferring problem loans from the bank to DAF, but we understand that the support measures that were being discussed at the end of 2014 and beginning of 2015 were subsequently changed," the statement said.

Instead of an asset transfer, an initial tranche of KZT250 billion (about US$1.3 billion) provided by the government to DAF will be used to provide KKB with long-term funding to help the bank facilitate its problem loans recovery and clean-up. KKB has signed an agreement with DAF to receive funding of KZT250 billion for 10 years and received the money in June. This should support KKB's capitalization.

We also understand that problem assets previously held by KKB and BTA are to be concentrated at BTA, which has ceased to exist as a banking institution. BTA will be deconsolidated from KKB. This should improve KKB ratio of nonperforming loans.

We expect to receive further information on the asset transfer and deconsolidation of BTA within the next three months. This will enable us to assess the potential impact of the transfer on KKB's capital position and resolve the CreditWatch placement, the statement said.

We will resolve the CreditWatch once we have further information regarding the terms and details of the transfer of assets between KKB and BTA and subsequent deconsolidation of BTA. Our analysis will also take into account any other developments that might affect our assessment of KKB's capital. We expect to be able to clarify the ratings impact of these changes over the next three months.

We could lower the ratings if KKB does not receive sufficient capital relief to cause our forecasted Standard & Poor's risk-adjusted capital (RAC) ratio to rise sustainably above 5%. A downgrade would become more likely if we observe a further deterioration in the quality of the loan portfolio, a weakening the capital position, or if the restructuring process becomes elongated.

follow the author on Twitter:@E_Kosolapova

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