Baku, Azerbaijan, Oct. 20
By Elena Kosolapova – Trend:
The International Rating Agency S&P Global Ratings raised its long-term counterparty credit rating on Kazakhstan-based Kazkommertsbank (KKB) to 'B-' from 'CCC+', the agency reported on Oct. 20. The outlook is negative. The agency also affirmed the 'C' short-term rating.
At the same time, S&P raised the Kazakhstan national scale rating on KKB to 'kzB+' from 'kzB-'.
“The upgrade reflects KKB's strengthened capitalization, as measured by our risk-adjusted capital ratio (RAC), thanks to small positive net income in the first half of 2016,” the company said.
The agency now expect the RAC ratio (4.5 percent on June 30, 2016) to remain comfortably above 3 percent in the next 18 months, contrary to the previous expectation that it would fall below this threshold. The forecast is based on a low growth rate in total loans and assets of 3-7 percent in 2016-2018, limited positive results, and the rebalancing of the loan portfolio to the retail and small and midsize enterprise (SME) sector from the construction and real estate industries.
While S&P no longer considers the bank's financial commitments to be unsustainable in the long term, KKB's management team continues to face difficulty in developing new business while addressing a legacy of poor asset quality, amid unsupportive operating conditions in Kazakhstan and weak capitalization. The bank's profits also remain dependent on the continued performance of BTA, a workout entity to which it remains heavily exposed.
The agency still views the bank as having high systemic importance in Kazakhstan, and that the government is supportive of the domestic banking sector. The assessment of the bank's systemic importance reflects its strong market share of 25 percent in total lending and 19 percent in retail deposits as of Sept. 1, 2016. KKB is also the largest recipient of funding under government support programs (430 billion tenge outstanding, including 250 billion tenge from Distressed Assets Fund for 10 years). S&P therefore incorporates in the ratings a two-notch uplift for government support.
The agency also factors in its view that KKB remains a poor performer in its peer group, mainly local Kazakh banks. It notes, for example, KKB's higher credit risk than its peers, due to its highly concentrated exposure to BTA, and a track record of volatile profitability with losses posted in 2012 and 2015.
The negative outlook on KKB reflects pressure on the bank's capitalization, profitability, and asset quality from the negative trends in the Kazakh economy and banking sector. The agency believes these trends will persist in the next 12 months, potentially undermining management's attempts to turn around the bank's profitability.
S&P could take a negative rating action in the next 12 months if it observed material deterioration in the bank's asset quality or creation of significant additional provisions. This could significantly weaken its capital buffers, resulting in the projected RAC ratio declining to below 3 percent. A notable reduction in the bank's liquid assets, which raises concerns about the bank's ability to repay forthcoming wholesale debt repayments, will also be negative for the ratings.
S&P would consider revising the outlook to stable in the next 12 months if it have greater confidence in the bank management's ability to deliver profitable growth and improve asset quality. This could be supported by stabilized operating conditions in the Kazakh banking sector. An outlook revision to stable would also hinge on KKB's ability to maintain stable funding and liquidity indicators and for the Kazakh government to continue supporting the bank.
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