Fitch revises Development Bank of Kazakhstan & KazAgroFinance’s otlks to pos

Wed Nov 23, 2011

Fitch revises Development Bank of Kazakhstan & KazAgroFinance's otlks to posNov 23- Fitch Ratings has revised the Outlooks on Development Bank of Kazakhstan (DBK) and KazAgroFinance’s (KAF) Long-term Issuer Default Ratings (IDRs) to Positive from Stable. At the same time, the agency has affirmed DBK’s Long-term foreign currency IDR at ‘BBB-‘ and Long-term local currency IDR at ‘BBB’, and affirmed KAF’s Long-term IDR at ‘BB’. A summary of the rating actions is at the end of this commentary.

The rating actions follow the agency’s upgrade of Kazakhstan’s Long-term foreign and local-currency IDRs to ‘BBB’ from ‘BBB-‘ and to ‘BBB+’ from ‘BBB’, respectively, on 21 November 2011. The Outlooks on Kazakhstan’s IDRs are Positive (for further information, see “Fitch Upgrades Kazakhstan to ‘BBB’; Outlook Positive”, at

DBK’s ratings reflect Fitch’s view of the very strong propensity of the Kazakh authorities to provide support in case of need. This view is based on DBK’s ultimate sovereign ownership, its important policy role as a development institution, the close association with the government and a solid track record of capital support.

At the same time, Fitch believes that DBK’s increasingly leveraged balance sheet and the now more material volumes of the bank’s wholesale debt warrant a minimum one-notch difference between the ratings of the sovereign and the bank, in particular at higher rating levels, where successive notches on the rating scale capture ever smaller differences in default probability. DBK’s wholesale debt had risen to USD4.3bn at end-H111, which is significant compared to gross government external debt (end-2011 forecast:USD5.3bn), but still less than 3% of GDP.

KAF’s ratings reflect Fitch’s view of the strong propensity of the Kazakh authorities to provide support in case of need. This takes into account the company’s full (albeit indirect) government ownership, its policy role in the agricultural sector, its small size (and hence low cost of any support required), the track record of government assistance to date and the low leverage with which the company operates.

However, the lower level of KAF’s ratings relative to DBK reflects the somewhat greater uncertainty about the provision of government support due to its less prominent policy role, lower importance for the country’s economy and financial system, less close association with the Kazakh authorities, the indirect nature of government ownership and the possibility for other government-controlled entities to take over KAF’s functions, in case of need.

DBK was founded to foster the growth of non-extracting industries in Kazakhstan. Its owner, the National Welfare Fund Samruk-Kazyna, is wholly owned by the state. DBK’s Basel I tier I capital ratio fell to 17% at end-H111 as a result of losses and business expansion, a level which is at best adequate given the bank’s unseasoned, concentrated and high-risk credit exposures, and its plans for further growth.