S&P affirms long-, short-term credit ratings on Kazakh bank PNB-Kazakhstan

Kazakhstan Materials 3 November 2015 19:15 (UTC +04:00)
Standard & Poor's Ratings Services has affirmed its 'B+/B' long- and short-term counterparty credit ratings on Kazakh bank PNB-Kazakhstan
S&P affirms long-, short-term credit ratings on Kazakh bank PNB-Kazakhstan

Baku, Azerbaijan, Nov. 3


Standard & Poor's Ratings Services has affirmed its 'B+/B' long- and short-term counterparty credit ratings on Kazakh bank PNB-Kazakhstan, the message of S&P said Nov. 3.

The outlook remains negative, according to the message.

The ratings service also affirmed its 'kzBBB-' Kazakh national scale rating.

"The affirmation reflects our view that, despite Punjab National Bank (PNB) reducing its stake in PNB-Kazakhstan to less than 50 percent, we continue to consider PNB-Kazakhstan moderately strategic to the group and to factor one notch of group support from PNB into our ratings on PNB-Kazakhstan," said the message.

The agency said that PNB is committed to following the state policy of strengthening ties and trade between India and Kazakhstan, allowing PNB-Kazakhstan to expand its client base through Indian companies present in the local market.

"NB's still high level of involvement in PNB-Kazakhstan's fundamental decision-making processes through its presence in all the management board meetings, board of directors meetings, and other committees," said the message. "In our view, PNB is able and willing to provide support to PNB-Kazakhstan if needed."

Following the change in PNB-Kazakhstan's ownership structure, a new Kazakh management team took over and plans to streamline the bank's decision-making procedures in order to become more dynamic and client oriented.

"Under our base case, we believe PNB's share in the bank will not fall below 35 percent in the coming two years, because we see limited needs for further capitalization (the estimated risk-adjusted capital ratio after the equity inflow in September 2015 was close to 95-100 percent)," said the message. "We believe this minimizes the risk of changes in the ownership structure and significant further dilution of PNB's stake."

PNB-Kazakhstan will play an important role in strengthening trade between India and Kazakhstan, according to S&P.

"Given that PNB is big government-owned bank, it is strongly influenced by political decisions and follows state policy," said the message. "As a result, PNB-Kazakhstan will be heavily involved in the further development and support of Indian entities in Kazakhstan, allowing the bank to benefit from a less confidence-sensitive client base. We assess the capacity of the Kazakh market to develop the Indian part of business as high. However, loans to Indian companies will be granted primarily on the PNB level and PNB-Kazakhstan will provide the settlement service and will participate in lending through syndication of loans, given its small absolute size."

Although PNB's involvement in the management and development of its Kazakh subsidiary has decreased--following the reduction of its share to less than 50 percent of total equity-the experts of S&P still consider it to be high, given PNB's presence in all management board and board of directors meetings as well as other committees.

"According to the shareholder agreement, all fundamental decisions must be made by majority and supported by at least one member of the board, or the management board, or committee (as applicable, depending on the event) who has been nominated by PNB and one who has been nominated by local Kazakh shareholders," the message said.

"The negative outlook on PNB-Kazakhstan reflects our expectation that the negative trends in the Kazakh economy and banking sector will persist in 2016 and may put pressure on the bank's capitalization, profitability, and funding."

S&P could lower the ratings if the economic slowdown and increased industry risks have a significantly adverse effect on PNB-Kazakhstan's franchise, especially its earnings and funding profile.

"We could also remove the one notch of group support if we see evidence of diminishing support from PNB or more restrained participation of PNB in the management and supervision of PNB-Kazakhstan," said the message.

S&P would consider revising the outlook to stable if operating conditions for the Kazakh banking sector as a whole stabilize, notably with stable industry and economic risk trends. To take such an action, the ratings service would also need to see PNB-Kazakhstan maintaining its very strong capital position and moderate risk position.