S&P affirms Kazakhstan's Tengri Bank at 'B+/B'

Business Materials 23 December 2016 15:45 (UTC +04:00)
The International Rating Agency S&P Global Ratings affirmed its 'B+' long-term and 'B' short-term counterparty credit ratings on Kazakhstan-based Tengri Bank
S&P affirms Kazakhstan's Tengri Bank at 'B+/B'

Baku, Azerbaijan, Dec. 23
By Elena Kosolapova - Trend:
The International Rating Agency S&P Global Ratings affirmed its 'B+' long-term and 'B' short-term counterparty credit ratings on Kazakhstan-based Tengri Bank, the rating agency reported. The outlook remains negative.
At the same time, S&P affirmed its 'kzBBB-' Kazakhstan national scale rating on the bank.

“We have observed a change in the bank's balance sheet during 2016 as it pursues growth, aided by a diversification of its funding base away from interbank deposits and shareholders' equity. Overall, we believe these changes are neutral for the Tengri Bank's credit profile,” S&P said.

The rating agency noted that, in particular, while this development signals a further reduction in the bank's capitalization as it moves toward a more leveraged business model, it also indicates that Tengri Bank is in a positive transition to improving its funding base. Additionally, S&P still factors one positive notch into its ratings for the potential extraordinary support to come from India-based Punjab National Bank (PNB), which owns 49 percent of Tengri Bank's authorized capital.

Tengri Bank is small Kazakh bank, which since the end of 2015 is in a strong growth phase under the control of long-term shareholder PNB and its majority local owners.

S&P noted that besides dilution of capitalization, the aggressive growth strategy planned for the next 12-18 months amid such an unsupportive economic backdrop might put additional pressure on Tengri Bank's credit profile, especially given that a large part of the loan portfolio has long terms and debt bullet repayments at maturity. High exposure to foreign currency lending adds further uncertainty to the performance of the bank's unseasoned loans.
The rating agency revised down its assessment of the bank's capital and earnings to strong from very strong owing to the view that asset growth will outpace shareholder capital injections.

S&P’s risk-adjusted capital (RAC) ratio for the bank stood at 16.7 percent as of Oct. 31, 2016, and the agency expects it to decline through the next 12-18 months, but to stabilize in the 10-15 percent range, helped by increasing the amount of authorized capital by approximately 35 percent in 2017. The base-case projection also assumes around 165 percent loan book growth in 2016 and 45 percent in 2017. Additionally, S&P expects that, over the next 12-18 months, the bank's profitability growth will be somewhat undermined by a weakening interest margin.
The reduced interest margin is the negative side of the reinforced funding position that could bring the bank's funding base in line with the system average.
S&P revised its assessment of Tengri Bank's stand-alone credit profile (SACP) to 'b-' from 'b' to reflect the weakening in capitalization. Moreover, although the agency has not yet revised its funding assessment from below average, it expects an improvement in funding and add one notch of uplift from the SACP to its long-term rating on Tengri Bank to reflect its view that the bank is in a positive transition.

S&P continues to regard Tengri as a moderately strategic subsidiary of PNB. This results in a one-notch uplift to the issuer credit rating to account for possible future extraordinary parental support.

The negative outlook on Tengri Bank reflects expectation that negative trends in the Kazakh economy and banking sector will persist in 2017 and may put pressure on the bank's capital and asset quality over the next 12-18 months.
S&P could lower its ratings over the next 12-18 months if the economic slowdown and increased banking industry risks appear likely to have an adverse effect on Tengri Bank's creditworthiness. The agency could also lower the ratings if it sees signs that the forecast RAC ratio will be lower than 10 percent over the next 12-18 months. Lastly, a negative rating action could follow if S&P sees reduced likelihood for parental support, for example if it observes that PNB's participation is more restrained participation in the management and supervision of Tengri Bank or there is a dilution of its current stake in Tengri Bank.

S&P would consider revising the outlook on Tengri Bank to stable over the next 12-18 months if it sees that the bank is able to manage high growth on the back of adverse market conditions with a very limited risk that the bank's RAC ratio would fall below 10 percent over the next 12-18 months. A revision would also be supported by further evidence that PNB will remain an active and committed shareholder.