Fitch downgrades BTA Bank (Kazakhstan) ratings

November 14. KASE

Fitch downgrades BTA Bank (Kazakhstan) ratingsFitch Ratings has downgraded Kazakhstan-based BTA Bank (BTA) and its subsidiary CJSC BTA Bank (Belarus)’s (BTAB) Long-term Issuer Default Ratings (IDR) to CCC’ from ‘B-‘. A full list of rating actions is at the end of this commentary.

The downgrades reflects Fitch’s view of the increased probability of BTA’s default in the near to medium term. This is driven by the recent sharp deterioration in the bank’s reported financial position and the apparent readiness of the bank and the Kazakh authorities to consider a range of options, including less creditor-friendly ones, for restoring the bank’s solvency.

At end-H111, BTA reported negative equity of KZT217bn (USD1.5bn), and management has indicated that end-Q311 accounts are likely to show a further KZT126bn (USD0.9bn) decrease in capital. The sharp deterioration in the bank’s reported capital position is being driven by negative pre-impairment results, de-recognition of deferred tax assets and further impairment charges on the bank’s loan book.

In Fitch’s view, BTA’s financial position has now deteriorated to such an extent that even quite favourable results of the bank’s loan recovery efforts (which is not the agency’s base case at present) would be insufficient by themselves to return the bank to solvency. Furthermore, the scale of BTA’s pre-impairment losses (KZT33bn or USD225m in H111) is such that elimination of the negative carry on the bank’s government-related assets and liabilities would only approximately halve, rather than fully eradicate these losses.

Fitch has previously stated that it “would be unlikely to downgrade BTA’s Long-term IDR solely on the basis of any disclosures from the bank indicating a deterioration in its financial position. However, if any such disclosures are not accompanied by a clear plan to restore the bank’s financial position, in particular through provision of external support from the Kazakh authorities, the rating could come under pressure,” (see ‘Fitch: Government Support is Key for BTA Bank’s ‘B-‘ Long-term IDR’ dated 21 April 2011 at www.fitchratings.com).

Fitch expects that any final decision on BTA will be made at a high political level, and is hence quite unpredictable. The agency also notes that the Kazakhstan sovereign (‘BBB-‘/Positive) has sufficient resources to provide necessary support to BTA if it chooses, and that the potential reputational damage from a repeated default of the bank provides some incentive for the Kazakh authorities to finance a bail-out. However, in the agency’s view, the risks of a default are considerable, and are now commensurate with a ‘CCC’ rating, indicating that default is a real possibility.

BTA could be downgraded further if the Kazakh authorities and/or the bank give a clear indication that a restructuring of the bank’s liabilities, under terms which Fitch would classify as a coercive debt exchange, will take place. Conversely, BTA could be upgraded if the bank is returned to solvency and viability without a default on its liabilities.

BTA could be downgraded further if the Kazakh authorities and/or the bank give a clear indication that a restructuring of the bank’s liabilities, under terms which Fitch would classify as a coercive debt exchange, will take place. Conversely, BTA could be upgraded if the bank is returned to solvency and viability without a default on its liabilities.

The downgrade of BTA’s Viability Rating (VR) to ‘f’ reflects Fitch’s view that the bank has failed and will almost certainly default if it does not receive external support.

The downgrade of BTAB’s Long-term IDR reflects the reduced probability of support from BTA. BTAB’s Long-term IDR is now aligned with its VR of ‘ccc’.

SK has held a 81.5% stake in BTA since the completion of the bank’s restructuring in 2010. BTA currently holds a 99.7% stake in BTAB.

The rating actions are as follows:

BTA Bank

Long-term foreign and local currency IDR downgraded to ‘CCC’ from ‘B-‘

Short-term foreign and local currency IDR: downgraded to ‘C’ from ‘B’

Viability Rating downgraded to ‘f’ from ‘cc’

Individual Rating downgraded to ‘F’ from ‘E’

Support Rating affirmed at ‘5’

Support Rating Floor revised to ‘CCC’ from ‘B-‘

Senior unsecured rating downgraded to ‘CCC’ from ‘B-‘; Recovery Rating at ‘RR4’

Subordinated debt rating downgraded to ‘C’ from ‘CC’; Recovery Rating at ‘RR6’

CJSC BTA Bank (Belarus)

Long-term foreign currency IDR downgraded to ‘CCC’ from ‘B-‘

Short-term foreign currency IDR downgraded to ‘C’ from ‘B’

Support Rating: affirmed at ‘5’

Viability Rating ‘ccc’ unaffected

Individual Rating ‘E’ unaffected

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