S&P affirms Eurasian Bank (Kazakhstan) credit ratings at “B/B”, revised the national scale rating from “kzBB” to “kzBB+”, outlook “Stable”

January 27. KASE

S&P affirms Eurasian Bank (Kazakhstan) credit ratings at "B/B", revised the national scale rating from "kzBB" to "kzBB+", outlook "Stable"Standard & Poor’s Ratings Services said today it revised its outlook on Kazakhstan-based JSC Eurasian Bank to stable from negative. At the same time, the ‘B/B’ long- and short-term counterparty credit ratings on the bank were affirmed. The national scale rating was raised to kzBB+’ from ‘kzBB’.

The rating actions reflect our view of the robust economic recovery in the Republic of Kazakhstan (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Kazakhstan national scale rating ‘kzAAA’) and stabilization of the operating environment (see “Outlooks On Kazakhstan-Based Kazkommertsbank (JSC), JSC Nurbank, And AsiaCredit Bank Revised To Stable; Ratings Affirmed,” published on Jan. 24, 2011, on RatingsDirect).

“They also reflect our view of a positive trend in Eurasian Bank’s asset quality and profitability, as well as the bank’s adequate funding and liquidity,” said Standard & Poor’s credit analyst Annette Ess.

Eurasian Bank is a midsize commercial bank with assets totalling Kazakhstani tenge (KZT) 336 billion (about $2.2 billion) as of Sept. 30, 2010, representing 2.9% of the domestic market. It is ultimately owned by three Kazakh businessmen, Alexander Mashkevitch, Alijhan Ibragimov, and Patokh Chodiev, who also hold a 44% stake in London Stock Exchange-listed Eurasian Natural Resources Corporation PLC (BB+/Stable/B).

Although we consider that the bank benefits from its shareholders’ business connections, the ratings reflect our assessment of Eurasian Bank’s stand-alone credit quality, with no uplift for extraordinary parental or government support, which we consider uncertain.

The new management team has turned the bank around and is focusing on improving asset quality and achieving profitability. As a result, nonperforming loans (NPLs; those 90 days overdue) at year-end 2010 reduced to 7.4% from 10.6% at year-end 2009, and restructured loans decreased to 25.0% from 31.4%. Our definition of loans under stress includes both NPLs and restructured loans. The improvements were supported by rigorous collections, stronger new loan underwriting, and lower exposure to the risky construction and real estate sectors than the system average. Loans to these sectors accounted for only 10% of Eurasian Bank’s portfolio on Sept. 30, 2010. New loan loss provisions reduced markedly in 2010 compared with 2009. The ratio of loan loss reserves to customer loans was 11.7% on Sept. 30, 2010, lower than the sector average.

Eurasian Bank’s low capitalization continues to be its major weakness, in our view. The estimated risk-adjusted capital (RAC) ratios of 3.8% before adjustments and 2.9% after adjustments for concentration as of Sept. 30, 2010, were the lowest among the Kazakh banks we rate, excluding defaulted banks. The ratio of adjusted total equity to adjusted assets was also low at 7.05% as of Sept. 30, 2010. Tier 1 and total capital adequacy ratios stood at 7.8% and 14.6%, respectively, at year-end 2010. A proposed capital increase of $50 million in the second half of 2011 and another $50 million in 2012 to support planned loan growth reflect the bank’s strategy of maximizing the return on equity while running tight capitalization. However, low profitability does not allow for an earnings buffer. The bank returned to profitability in the second half 2010 with an expected small profit for the full year.

We view the bank’s liquidity as adequate, owing to a 30% share of liquid assets as of Nov. 30, 2010. However, we expect this to decline because the bank aims to achieve a higher return on assets. Moreover, the loans-to-deposits ratio of 87.9% on Sept. 30, 2010, was one of the strongest among rated Kazakh banks. The bank does not have any foreign debt outstanding.

“The outlook is stable because we believe that Eurasian Bank’s creditworthiness should be adequately resilient, given the improved economic growth prospects and stabilized operating environment,” said Ms. Ess. “We expect capitalization to increase slightly, supported by enhanced internal capital generation and the shareholders’ capital contribution, and asset quality improvements to continue.”

The ratings could be lowered if the bank’s asset quality or capitalization weakened or if its provisioning became inadequate. Upside for the ratings could result from a significant strengthening of capitalization, resulting in a RAC ratio of more than 7%; a continuously positive trend of reducing loans under stress; marked improvement in profitability; and the maintenance of adequate liquidity.