Fitch downgrades Kazkommertsbank to 'CCC'

Kazakhstan Materials 21 January 2016 09:39 (UTC +04:00)
Fitch Ratings has downgraded Kazkommertsbank's (KKB) the Long-term Issuer Default Ratings (IDRs) to 'CCC' from 'B-'
Fitch downgrades Kazkommertsbank to 'CCC'

Baku, Azerbaijan, Jan. 21


Fitch Ratings has downgraded Kazkommertsbank's (KKB) the Long-term Issuer Default Ratings (IDRs) to 'CCC' from 'B-', said the message of the agency posted Jan. 20.

The agency has also affirmed the Long-term IDRs of subsidiary bank Sberbank of Russia, JSC (SBK) at 'BB+', Halyk Bank of Kazakhstan (HB) at 'BB', Tsesnabank (TSB) at 'B+', Bank Centercredit (BCC) at 'B' and ATF Bank JSC at 'B-'.

The outlook on Tsesnabank has been revised to negative from stable. The outlooks on Halyk, BCC and ATF are stable and on SBK negative. SBK's Viability Rating (VR) has been downgraded to 'b+' from 'bb-'.

The negative rating actions on KKB, SBK and Tsesnabank reflect increased pressure on the banks' asset quality and capitalization, primarily as a result of the depreciation of the Kazakh tenge and the slowdown of the domestic economy, said the message. The affirmation of HB reflects the bank's sizable capital buffer and strong pre-impairment profitability, which should enable it to absorb any moderate further pressure on asset quality. The affirmations of BCC and ATF reflect their low ratings, which already largely capture risks relating to the weaker operating environment, and - in BCC's case - a fairly low proportion of foreign currency loans.

"Each of the banks has faced considerable increase in deposit dollarisation over the last two years, with the proportion of foreign currency liabilities ranging between 58 percent and 68 percent (with the exception of BCC - 46 percent) at the end of the third quarter of 2015," the message said. "Banks have been able to maintain close-to-flat FX positions as a result of cheap currency swaps from the National Bank of Kazakhstan (NBK), and Fitch expects these to remain available. However, increased balance sheet dollarisation has resulted in a heightened proportion of foreign currency loans, which will be difficult to reduce materially over the medium term."

KKB's downgrade reflects a significant increase in the volume of problem (mostly foreign currency- denominated) exposures relative to Fitch Core Capital (FCC), primarily as a result of the tenge's devaluation. The ratings also consider the bank's weak recurring profitability. Taking into account the increased volume and weaker recovery prospects of the problem exposures, Fitch believes KKB will, ultimately, likely require external capital support and/or a restructuring of its liabilities to restore its solvency. However, the extended track record of regulatory forbearance and debt service to date suggests that the bank's resolution may not be a near-term event.

KKB's main problem asset is its exposure to former subsidiary BTA Bank, which increased to 5.3x FCC at end of the third quarter of 2015 from 4.1x FCC at the end of the first quarter of 2015 (3.5x FCC estimated by Fitch when it downgraded KKB in August 2015) and comprised 51 percent of KKB's gross loans, said the agency. These loans, which are ultimately backed by land exposures on BTA's balance sheet with remote/unclear recovery prospects, are likely to have increased to approximately 6.5x FCC at late 2015, following further tenge depreciation in fourth quarter of 2015.

Non-performing loans (NPLs) made up a further 14 percent of gross loans (i.e. 27 percent of the portfolio net of the BTA exposure) at end of the third quarter of 2015, and a moderate 0.4x FCC net of specific impairment reserves. Further asset quality risks stem from currently performing foreign-currency loans, which accounted for eight percent of the loan portfolio (0.8x FCC) and property investments comprising an additional 0.2x FCC at the end of the third quarter of 2015.

"Pre-impairment profit (excluding fair-value gains on funding from the Problem Loan Fund, uncollected accrued interest on loans and foreign-currency gains) was slightly negative in 9M15 and we expect this to deepen to an amount equal to approximately 1.4 percent of gross loans in 2016, net of interest accrued on the BTA exposure," said the message. "After provisions (and notwithstanding the fair-value and trading gains) for nine months of 2015 net loss consumed five percent of late 2014 equity, and there is a high likelihood of net losses in 2016 further eating into capital."

The message of the agency also touches upon factors that may affect the ratings in the future.

"KKB's ratings could be further downgraded if the likelihood increases that senior creditors will suffer losses as a result of measures to restore the bank's capital, or if the bank's capital ratios are further eroded as a result of tenge depreciation and losses," said the message. "The ratings could be upgraded if the bank is recapitalized without senior creditors facing losses."

The VRs of HB, TSB, BCC, ATF and SBK, and consequently the Long-term IDRs of the first four banks and of HB's subsidiaries, could be downgraded if their asset quality, core profitability, and capitalization deteriorate and/or liquidity levels fall substantially.

"SBK's Long-term IDRs would likely be downgraded if the parent's Long-term IDRs are downgraded, a risk reflected in the negative outlooks on both banks," said the message. "An upgrade of the ratings of HB and its subsidiaries would be on contingent on the operating environment improving and the bank maintaining its currently strong financial metrics. An upgrade of the VRs of BCC, ATF and SBK, and consequently the Long-term IDRs of BCC and ATF, would be contingent on significant problem loan recoveries and/or additional capital provided by their respective shareholders (more likely in the case of SBK)."

"TSB's ratings could stabilize at their current levels in case of an extended track record of reasonable asset quality and performance metrics in the tougher operating environment," said the message.