Fitch affirms ratings of Development Bank of Kazakhstan and KazAgroFinance

June 21. Trend

Fitch affirms ratings of Development Bank of Kazakhstan and KazAgroFinanceFitch Ratings has affirmed the Development Bank of Kazakhstan’s (DBK) and KazAgroFinance’s (KAF) Long-term foreign currency Issuer Default Ratings (IDRs) at ‘BBB-’ and ‘BB’, respectively, the agency reported.

DBK’s ratings reflect Fitch’s view of the strong propensity for the Kazakhstani authorities to provide support in case of need, based on state ownership and the bank’s special legal mandate and significant policy role underpinned by its participation in high-profile investment projects.

Moreover, the agency believes that DBK’s potential default would result in significant reputational risks for the government given the bank’s overt market presence.

However, Fitch notes that the bank’s ratings have a Stable Outlook and are unlikely to change even if Kazakhstan’s Long-term IDRs are upgraded to ‘BBB’. This mirrors the agency’s usual practice of notching the ratings of state-owned banks down from their respective sovereigns, particularly at the higher rating levels.

DBK has significantly increased its foreign borrowings since end-2007, with the bulk of non-equity funding (94%) coming from international investors at end-2010. At the same time, capital adequacy has deteriorated, and Fitch core capital-to-weighted risks ratio decreased to 18% at end-2010 from 24% at end-2009. Loan quality is also weak with 27% of gross loans reported non-performing, although this is largely in line with other Kazakh financial institutions.

On the positive side, Fitch notes that DBK has a solid track record of receiving equity support from the government. Also, the proportion of liquid assets is currently high, with loans and finance leasing accounting for only 36% of total assets at end-2010. Given that the nearest significant debt redemptions are scheduled for 2015, DBK appears to have reasonable financial flexibility at present.

However, Fitch notes that downward pressure on DBK’s ratings could arise over the medium term should the bank continue to expand rapidly, resulting in its non-government debt and balance sheet size becoming more substantial relative to those of the sovereign. DBK’s debt now amounts to approximately 4% of the nation’s gross external debt.

KAF’s Long-term IDRs are two notches lower than DBK’s, reflecting its less prominent role and importance for the local economy. The agency’s view of support probability also takes into account the defaults of other Kazakh financial companies during 2009.

At the same time, KAF’s ratings continue to factor in moderate probability of government support in light of its state ownership, small size (hence, cost of support) and reasonable track record of past equity contributions.

KAF’s asset quality is also weak, with non-performing loans and restructured loans comprised 13% and 34% of the loan book at end-2010, respectively. However, it had a solid capital buffer reported at end-2010. The local Tier I capital adequacy ratio stood at 58% and management expects significant new injections in the near term.

DBK was founded to foster the growth of non-extracting industries in Kazakhstan. Its owner, Sovereign Wealth Fund Samruk-Kazyna, is wholly owned by the state. KAF is a non-banking financial institution predominantly providing finance leases to the domestic agricultural industry. KAF is a subsidiary company of the state-owned JSC National Holding Kazagro.