Fitch downgrades Tsesnabank to 'B', affirms 5 other Kazakh banks

Fitch downgrades Tsesnabank to 'B', affirms 5 other Kazakh banks

Baku, Azerbaijan, Dec. 22
By Elena Kosolapova – Trend:
The international rating agency Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Kazakh Tsesnabank (TSB) to 'B' from 'B+' and affirmed the Long-Term IDRs of Kazakhstan’s Kazkommertsbank (KKB), Halyk Bank of Kazakhstan (HB), ATF Bank, Bank Centercredit (BCC), and Subsidiary Bank Sberbank of Russia JSC (SBK), the rating agency reported Dec. 22.

The Outlooks are Stable. Fitch has also affirmed one of HB's domestic subsidiaries, JSC Halyk Finance (HF) with a Stable Outlook and maintained its other, Altyn Bank JSC (AB), on Rating Watch Positive (RWP).

“The banks' Long-Term IDRs are driven by their Viability Ratings (VRs), except SBK whose Long-Term IDRs reflect Fitch's view of potential support from its parent, Sberbank of Russia (SBR; BBB-/Stable),” Fitch said.


The affirmation of HB's Long-Term IDRs at 'BB' and VR at 'bb' reflects its strong franchise, solid profitability and capitalisation. The bank's liquidity cushion is large and refinancing risks are limited, in Fitch's view. At the same time, the elevated levels of HB's problem and potentially problematic loans as well as the broader scope of risks inherent in Kazakhstan's operating environment still constrain HB's ratings.

According to Fitch, HB retains the strongest loss absorption capacity among large Kazakh banks due to its solid pre-impairment profitability and a large buffer of core capital.
HB's liquidity is also the strongest among the peers given its liquid assets of 35 percent of liabilities at end-3Q16 compared with the Eurobond repayments in 2017 of only $0.6 billion or 5 percent of liabilities.


The affirmation of KKB's 'CCC' Long-term IDR and 'ccc' VR reflects Fitch's view of the bank's significant distressed assets and modest loss absorption capacity. Positively, KKB's ratings factor in its recent track record of foreign debt repayments in a relatively stressful environment, and its sufficient liquidity relative to the Eurobond payments forthcoming in 2017.

Fitch's view of the weak asset quality is driven by KKB's large loan exposure to BTA, its former subsidiary currently operating as a distressed asset manager, equalling half of KKB's loans or 6x FCC at end-1H16. Fitch expects only modest cash recoveries from this portfolio in the foreseeable future despite the exposure being reported as performing.
Fitch views positively the bank's extensive track record of repayments on senior and subordinated Eurobonds, including $ 0.2 billion subordinated notes and $ 0.4 billion senior Eurobonds during 2016. The November paydown reduced KKB's liquidity but Fitch believes it remains adequate relative to 2017's Eurobond repayments. KKB's high funding concentration and instability of one of its largest depositors are moderately negative.


The downgrades of TSB's Long-Term IDRs to 'B' from 'B+' and its VR to 'b' from 'b+' are driven by Fitch's view of the bank's deteriorating asset quality and profitability while its capitalisation remains only moderate. Positively, TSB's ratings consider its recently improved liquidity and the record of it accessing financing from quasi-state sources and state-controlled companies.


The affirmation of BCC's Long-Term IDRs at 'B' and VR at 'b' reflects the bank's still significant problem loans, modest capitalisation, and moderate performance. The ratings benefit to a degree from BCC's lower than peers' foreign currency lending (mostly already recognised as impaired), stable and improving domestic deposits base and its improved liquidity position.


The affirmation of ATF's Long-Term IDRs at 'B-' and VR at 'b-' reflects the bank's persistently weak asset quality, low capitalisation and only modest core profitability. Fitch believes ATF is also exposed to relatively high liquidity risks considering the possible deposit outflows, partially mitigated by its currently large liquidity cushion.


The affirmation of SBK's 'BB+' Long-term IDRs and '3' Support Rating reflects Fitch's view of the moderate probability of potential support from the parent bank based on the strategic importance of the CIS region for SBR and the small size of SBK relative to its parent.

The affirmation of SBK's VR reflects Fitch's view that its credit profile is still consistent with the 'b+' level, mainly thanks to the ordinary benefits of support from SBR as well as still decent core profitability and comfortable liquidity, despite the recent continued weakening of asset quality and capitalisation.


The RWP on AB's 'BB' IDRs and 'A+(kaz) 'National Long-Term rating reflects the upside potential for these ratings from an acquisition of a 60% equity stake in the bank by China Citic Bank (CCB; BBB/Stable) in 2017. Fitch also expects that AB would be supported, if needed, by HB, which currently owns 100% of AB's ordinary shares. HB signed a memorandum of understanding with CCB in November 2016.


HF's 'BB' Long-term IDRs are aligned with the ratings of its parent as Fitch considers HF a core subsidiary of HB. This opinion is based on HF's prominent market positions in investment banking and brokerage services to domestic clients and significant potential reputational risks for HB should its subsidiary default on obligations. HF's moderate size at 1% of HB's total assets at end-3Q16, and its healthy balance sheet make it relatively easy to support.

“Fitch's baseline SRF for domestic systemically important banks at 'B-' reflects the agency's view that large-scale capital support would be unlikely to be forthcoming for any Kazakh commercial banks, given the history of defaults by systemic banks and other institutions,” the rating agency said. “Nevertheless, Fitch expects most banks in Kazakhstan to continue benefiting from liquidity and other financial assistance provided by the state and quasi-state sources.”

HB's SRF of 'B' and SR of '4' reflects its exceptionally high systemic importance, based on its large 17% deposit market share and by far the largest regional branch network, which in addition to its solid political connections make moderate state support possible.

KKB's 'No Floor' SRF is based on Fitch's expectations that support from the Kazakh authorities in the amount sufficient to address the bank's large asset quality and capitalisation problems without senior creditors facing losses remains unreliable.

SRFs of 'No Floor' and SRs at '5' of TSB, ATF and BCC reflect these bank's moderate market shares, from 6 to 9 percent of system deposits at end-3Q16 and, therefore, these banks' non-systemic status.
The VR-driven Long-Term IDRs would mainly be sensitive to changes in the banks' asset quality and capitalisation parameters. Significant liquidity deterioration and weakening of core profitability would be negative.

The Long-Term IDRs of SBK and HF would likely change in tandem with the ratings of their respective parents. AB's ratings could be upgraded upon its acquisition by CCB which may take more than six months to complete.
Debt ratings would change with their respective anchor ratings.

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