Fitch upgrades Temirbank (Kazakhstan) rating, outlook “Stable”

November 12. KASE

Fitch upgrades Temirbank (Kazakhstan) rating, outlook "Stable"Fitch Ratings has upgraded Kazakhstan-based Temirbank’s (Temir) Long-term foreign currency Issuer Default Rating (IDR) to ‘B-‘ from ‘RD’ (‘Restricted Default’), and assigned a Stable Outlook. The rating action follows the completion of the restructuring of Temir’s liabilities. A full list of rating actions is provided at the end of this commentary.

Temir’s ratings reflect the bank’s still weak asset quality, its challenges in establishing a viable business model and sustainable franchise, and the lack of track record following the restructuring. However, the ratings also take account of the long-term nature of much of the bank’s funding, government control of the bank and the possibility of further state funding support, in case of need.

Asset quality is exceptionally weak with NPLs (loans overdue by more than 90 days) equal to roughly 58.5% of the portfolio at end-H110. Loan impairment reserves provided 61.7% coverage of NPLs under IFRS. Fitch notes that exposure to former related parties in Temir’s corporate book is rather limited, and that the retail portfolio comprises primarily secured lending. These two factors should help to support loan recoveries, although the extent and impact of these recoveries on the bank’s capital position are a source of significant uncertainty.

The bank wrote-off USD0.7bn of foreign debt as a result of the restructuring, and maturities of wholesale obligations were significantly extended. The funding structure is now heavily reliant on government-related funds provided by BTA Bank (Temir’s former shareholder) and Samruk-Kazyna (the National Welfare Fund of Kazakhstan), which together constituted 42% of non-equity funding at end-H110. Funding maturing after 2019, including the BTA deposit and bonds issued or extended as a result of the restructuring, comprised a large 60% of liabilities at end-H110, although this will probably reduce as the bank seeks to diversify its funding base.

Post-restructuring, the bank reported solid looking Basel I capital ratios of 33.2% total and 23.1% tier 1, based on H110 IFRS accounts. However, the regulatory ratios were a more moderate 16.3% and 8.6% at the same date, due to different loan impairment provisioning rules (reserves covered NPLs by 88.1% in local accounts). Fitch also notes the poor quality of the bank’s capital, as accrued interest in local accounts (against which no extra provisions are held) constituted a high 94% of common equity at end-Q310. Uncertainty about NPL recoveries also make it difficult to forecast the future development of the bank’s capital position.

Temir’s ratings could be upgraded if loan recoveries help to strengthen the capital position and the bank demonstrates its ability to develop its franchise, strengthen risk management and generate robust core earnings. Further unreserved losses in the loan book could exert downward pressure on the ratings.                                                             

At end-Q310, Temir was the 13th largest bank in Kazakhstan, with a 1.6% share of assets. Following the restructuring, the bank is 79.9%-owned by Samruk- Kazyna, with the rest held primarily by international former creditors of the bank. Fitch notes that the authorities do not regard Temir as a strategic investment and are considering sale of the bank in the medium term.