Baku, Azerbaijan, May 13
By Elena Kosolapova - Trend:
International Ratings Agency Fitch Ratings has downgraded Development Bank of Kazakhstan's (DBK) long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BBB' and 'BBB+', respectively, and House Construction and Savings Bank of Kazakhstan's (HSCBK) long-term local currency IDR to 'BBB-' from 'BBB+'. The agency has also downgraded the long-term IDRs of KazAgroFinance (KAF) to 'BB+' from 'BBB-'. The Outlooks are stable.
The downgrades of these institutions are driven by Fitch's recent actions on Kazakhstan's sovereign ratings.
Fitch has assigned KAF's planned Series 1 senior unsecured debt issue worth 77 billion Kazakh tenges under its second bond programme an expected long-term rating of 'BB+(EXP)' and National rating of 'AA(kaz)(EXP)'.
The long-term IDRs of DBK and HCSBK are based on their 'BBB-' Support Rating Floors (SRF), which reflect Fitch's view of the high probability of state support, if needed, for both institutions. This view is primarily based on (i) the banks' 100-percent ultimate sovereign ownership and (ii) their important policy roles in the development of, respectively, non-extracting economic sectors and the house savings and mortgage system in Kazakhstan.
The probability of DBK requiring support, according to Fitch, is significant in light of its material, albeit recently stable, wholesale third-party debt ($4.3 billion or 85 percent of liabilities at the end of 2015), moderate capital buffer (15 percent Fitch Core Capital (FCC)/risk-weighted assets (RWAs) ratio at the end of 2015, moderately down from 19 percent at the end of 2014) and significant foreign-currency loans (70 percent of gross loans at the end of 2015) predominantly to high-risk development projects. Nevertheless, the Kazakh government still has the ability, in Fitch's view, to support DBK given that the bank's third-party wholesale obligations at the end of 2015 were equal to a moderate 3.8 percent of Kazakhstan's GDP or 5 percent of sovereign reserves.
HCSBK is less likely, in Fitch's view, to need support in the medium term in light of its solid loan quality (0.5 percent non-performing loan ratio at the end of 1Q2016) and strong capital buffer (55 percent FCC ratio at the end of 2015). The bank's small size ($1.4 billion equal to 0.3 percent of GDP or 0.4 percent of sovereign reserves at the end of 2015), limited third-party non-deposit liabilities and low balance-sheet dollarization should also help to reduce support requirements. However, Fitch expects the bank's reliance on state funding (17 percent of total liabilities at the end of 2015) and subsidies to grow over the longer term as early-stage mortgage savings programs mature.
Fitch believes the authorities' plans to partially privatize HCSBK will not significantly affect the state's support propensity, given the intention to retain a controlling stake in the bank and maintain its policy role. Fitch has not assigned a long-term foreign currency IDR to HCSBK due to its immaterial foreign currency operations.
KAF's 'BB+' long-term IDRs are based on Fitch's view of the moderate probability of state support to the company given its policy role in provision of state-subsidized financial leasing and project financing to the agricultural sector.
The probability of the company requiring state support in the future is significant considering its operations in the vulnerable agricultural sector. Non-performing and restructured loans/leases comprised a high 11 percent and 15 percent of gross exposures at the end of 2015, respectively, although asset quality is supported to a degree by low foreign-currency lending, solid collateral coverage and state subsidies to borrowers/lessees. Impairment reserves covered 9 percent of gross exposures, while the depreciation-driven revaluation of imported and subsequently leased equipment has further boosted collateral coverage of KAF's portfolio.
The long-term IDRs for DBK and HCSBK are likely to remain one notch below the sovereign and for KAF two notches below. The long-term IDRs of all three institutions are likely to move in tandem with the sovereign ratings.
The ratings of DBK or HCSBK could be upgraded and equalised with the sovereign if (i) the banks become directly owned by the government and the state officials become more directly involved in the oversight of the institutions; or (ii) the government replaces or guarantees most of the banks' funding. A marked weakening of policy roles or association with the sovereign could result in negative rating actions. However, neither scenario is currently expected by Fitch.
DBK's ratings could also come under downward pressure if leverage increases markedly and asset quality deteriorates sharply without adequate capital support from the authorities.
KAF's long-term IDRs could be downgraded if the authorities' plan to privatize the company, the implementation of which is highly uncertain at present, leads to a weakening of KAF's connection with the Kazakh government.
Edited by SI
Follow the author on Twitter: @E_Kosolapova