S&P upgrades BTA Bank (Kazakhstan) ratings

October 26. KASE

S&P upgrades BTA Bank (Kazakhstan) ratingsStandard & Poor’s Ratings Services said today that it had raised its long-term counterparty credit ratings on Kazakhstan-based BTA Bank J.S.C. (BTA) to ‘B-‘ from ‘D’ and its short-term counterparty credit ratings to ‘C’ from ‘D’. The outlook is stable. At the same time, we assigned a ‘kzBB-‘ Kazakhstan national scale rating.

“The upgrade reflects the improvement of BTA’s stand-alone credit profile resulting from the completion of the restructuring of its wholesale debt, as well as our incorporation in our assessment of the stand-alone credit profile of ongoing financial support from the Kazakh government,” said Standard & Poor’s credit analyst Ekaterina Trofimova.

The final rating incorporates a one-notch uplift above the stand-alone credit profile because we expect a “moderate” probability of potential timely and extraordinary government support if required.

Very weak asset quality and capitalization, poor earnings, and a somewhat tight repayment schedule remain the key weaknesses for the ratings.

With assets of $13 billion on Sept. 1, 2010, BTA ranked among the top three banks in Kazakhstan. BTA reported market shares of 16% by assets and 21% by loans as of Sept. 1, 2010. However, these high nominal figures overstate its real market position and business franchise, given significant nonperforming loans (NPLs) accumulated on the books.

We consider BTA to be a government-related entity according to our criteria. Our one-notch uplift from BTA’s stand-alone credit profile reflects:

– BTA’s “strong” link with the government. As a result of restructuring, 100% state-owned holding and investment company Samruk-Kazyna (not rated) now owns 81.5% of the bank and BTA currently represents one of the government’s largest investments in the financial sector; and

– BTA’s “limited” importance for Kazakhstan’s economy because the bank’s market share is reducing and the bank does not provide a specific public service that cannot be provided by other commercial banks.

The stable outlook reflects our expectation that the Kazakh government will continue to provide substantial ongoing liquidity support as the bank cleans it loan book, diversifies its funding base, and reinvigorates its business franchise.

“We may lower the ratings if we perceive that the Kazakh government’s stance toward the bank is no longer consistent with a “moderate” likelihood of support, or if BTA’s weak earnings and poor asset quality do not improve but further threaten the bank’s financial health and pressure its liquidity profile and refinance risks increase sharply,” said Ms. Trofimova.

Under our base-case scenario, we see limited ratings upside potential in the medium term, unless the weight of problem loans is lifted from the bank and it can reinvigorate its business franchise and boost earnings, or if a new owner with strong capacity and willingness to provide substantial financial support is sought.