Kazkommertsbank may struggle to ensure stability of new business generation – S&P

Business Materials 16 October 2015 18:03 (UTC +04:00)

Baku, Azerbaijan, Oct.16

By Elena Kosolapova - Trend:

Standard & Poor's Ratings Services has lowered to 'B-' from 'B' its long-term counterparty credit rating on Kazakhstan-based Kazkommertsbank (KKB).

At the same time, it lowered the Kazakhstan national scale rating to 'kzBB-' from 'kzBB'.

In addition, S&P removed the ratings from CreditWatch with negative implications, where they were placed on Oct. 13, 2014.

"The outlook is negative. We also affirmed the 'C' short-term rating on KKB," said the agency.

"We believe that KKB's capitalization by our measures will be very weak over the next 12-18 months, pressured by nonperforming loans (NPLs) that originated before the 2008 financial crisis," said the message from the S&P.

Furthermore, the acquisition of BTA Bank and the subsequent transfer of some assets to KKB from BTA and others to BTA from KKB, has further complicated an already challenging situation for KKB, according to the rating agency.

BTA is a failed bank with an even higher level of problem assets than KKB--as of June 1, 2015, KKB reported NPLs at 21 percent, while BTA had 86 percent.

S&P doesn't believe that the transfer of KKB loans (gross value of Kazakhstani tenge [KZT] 1,500 billion) to BTA, and the subsequent financing of the same loans through the issuance of a new KZT1, 400 billion 10-year loan to BTA, substantially improves the quality of the underlying loans.

The agency believes that KKB's provisioning level may not be adequate to absorb potential further losses.

In addition, S&P expects the quality of the loan book to deteriorate further toward the end of 2015 as the tenge has depreciated by more than 30 percent since August 2015 and a sizable part of KKB's loan book is denominated in foreign currency.

Based on the revised expectations regarding the bank's projected RAC ratio, S&P has revised down its assessment of KKB's capital position to "very weak" from "moderate."

The agency believes the bank's RAC ratio before adjustments for diversification will decrease to less than 3 percent over the next 12-18 months (estimated RAC as of June 2015: 3 percent).

Its assumptions include there being nearly no new lending growth in 2015 and 2016 and the expectation of additional provisions that the bank will need to create, which are comparable with the provisioning expenses reported in 2014-2015.

S&P has revised up its assessment of KKB's liquidity position to "adequate" from "moderate," reflecting that its liquidity metrics have substantially improved and are now on par with peer banks.

To a large extent, this improvement is due to KKB receiving KZT250 billion from the state-related Problem Loans Fund, earlier this year.

"We assess KKB's funding position as "average," reflecting the bank's limited reliance on wholesale funding and its comfortable stable funding ratio," said the message.

The rating agency has not changed its assessment of KKB's business position from "moderate," as it continues to reflect the bank's leading position in Kazakhstan in terms of total assets and loan book size.

At the same time, the assessment is balanced by KKB's weak new business generation and the challenges that management faces due to its significant legacy problem asset portfolio, according to the message.

"We therefore assess KKB's stand-alone credit profile (SACP) as 'ccc'," said S&P. "The ratings on KKB also reflect our view that the bank has high systemic importance for the government due to its size and market share, and therefore the long-term rating on KKB is two notches higher than the SACP."

The negative outlook on KKB reflects the agency's opinion that it may struggle to ensure stability of new business generation and revenues, despite being the largest bank in Kazakhstan in terms of total assets or gross loans.

S&P could also lower the ratings if it revises down its view of KKB's systemic importance and therefore the likelihood of the government providing support to the bank in case of need.

Although S&P views a positive rating action as unlikely over the next 12-18 months, it notes that a new controlling shareholder, together with KKB's management, is making significant efforts to restructure and stabilize the bank.

The agency believes that these might bear fruit in the long term and support the bank's business position.

Edited by SI


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