Moody’s concludes ratings review of five Kazakh financial institutions

July 13. The Asian Banker

Moody's concludes ratings review of five Kazakh financial institutionsIssuer ratings of three financial institutions have been downgraded Moody’s Investors Service has downgraded the ratings of three Kazakh government-related issuers (GRIs) (Kazagrofinance – issuer rating to Ba1 from Baa3; Agrarian Credit Corporation – issuer rating to Ba1 from Baa3, and Kazakhstan Mortgage Company – issuer rating to Ba2 from Baa3) and confirmed the ratings of one Kazakh GRI (Development Bank of Kazakhstan – issuer rating Baa2) and one bank that is fully controlled by the Kazakh government (House Construction Savings Bank of Kazakhstan – Local currency deposit rating Baa3). The outlook on the five financial institutions’ issuer and deposit ratings is negative, in line with the negative outlook on Kazakhstan’s sovereign rating.

These rating actions conclude Moody’s review process which was initiated on 22 May 2009 and prompted by concerns that ongoing stress in the nation’s economy, particularly within its financial sector, might result in the government having to become more selective in allocation of support to its state-owned financial institutions.

The rating agency continues to believe that the Kazakh government will provide support to the government-owned financial institutions given that they pursue special policy mandates and are strategically important to the national economy. However, the ongoing transformations in the state economic programmes and the way in which they are accomplished have led Moody’s to further distinguish the support profiles of some of those state-owned financial institutions as is discussed below on a name-by-name basis. Moody’s notes that the multiple layers of control structures and the necessity to go through budget processes for obtaining additional financial support from the government may cause some delays in providing systemic support.

The detailed list of rating actions concluded, and the five affected financial institutions are as follows:

Development Bank of Kazakhstan (DBK):

– Baseline Credit Assessment: unchanged in the range of 11-13;
– Local and foreign currency issuer ratings: confirmed at Baa2;
– The outlook on all of the bank’s ratings is negative.

House Construction Savings Bank of Kazakhstan (HCSBK):

– BFSR: unchanged at E+ (mapping to a Baseline Credit Assessment of B2), stable outlook;
– Local currency deposit rating: confirmed at Baa3;
– The outlook on the local currency deposit rating is negative.

Kazagrofinance (KAF):

– Baseline Credit Assessment: confirmed at 15;
– Local and foreign currency issuer ratings: downgraded to Ba1 from Baa3;
– Local and foreign currency short-term issuer rating: downgraded to Not Prime from Prime-3;
– The outlook on the ratings is negative.

Agrarian Credit Corporation (ACC):

– Baseline Credit Assessment: confirmed at 15;
– Local and foreign currency issuer ratings: downgraded to Ba1 from Baa3;
– Local and foreign currency short-term issuer rating: downgraded to Not Prime from Prime-2;
– The outlook on the ratings is negative.

Kazakhstan Mortgage Company (KMC):

– Baseline Credit Assessment: lowered to 15 from 14;
– Local currency issuer rating: downgraded to Ba2 from Baa3;
– The outlook on the rating is negative.

DBK’s issuer rating (Baa2) was confirmed reflecting its increasing role in the country’s strategic development, tight oversight by national authorities and dominant position in providing long-term investments for non-extractive industries in Kazakhstan. DBK’s issuer rating significantly benefits from a very high probability of systemic support, resulting in the bank’s ratings being placed at the same level as those of the Kazakhstan government bond ratings. At the same time, Moody’s notes the risks of DBK’s high loan book concentration on largest projects and significant share of still unseasoned greenfield investments, which could potentially weigh on the issuer’s financial performance over time.

The downgrade of the issuer ratings of KAF (to Ba1 from Baa3) and ACC (to Ba1 from Baa3) reflects (i) the companies’ increasing dependence on the systemic support caused by the necessity to refinance their maturing wholesale debt in the medium term, while the access to capital markets is likely to remain tight, and (ii) the limited range of external support mechanisms which are subject to possible delays due to more complex bureaucratic procedures compared to banking financial institutions. At the same time, Moody’s believes that the agrarian sector is of significant importance for the Kazakh government, especially in the current economic environment. Furthermore, the identical downgrades of the companies’ ratings indicate Moody’s assessment of their similar risk profiles as well as their equal importance for the national economy.

The downgrade of KMC’s issuer rating (to Ba2 from Baa3) reflects the lowering of its BCA as well as the low probability of government support incorporated into the company’s issuer rating. The lowering of the BCA stemmed from the KMC’s material refinancing risk, prompted by the imbalance between long-term mortgage assets and high reliance on market funding, which may potentially affect its financial fundamentals and – most importantly – its liquidity profile. At the same time, the change in government support assumptions was triggered by the recently reduced role of the company in supporting the housing sector, as government spending to finance housing programmes through KMC have been discontinued.

PREVIOUS RATING ACTION AND PRINCIPAL METHODOLOGIES

Moody’s previous rating action on the five government-owned financial institutions was on 22 May 2009, when the rating agency placed their issuer and deposit ratings on review for possible downgrade. The rating action followed the default of Astana Finance – another Kazakh GRI – which had previously benefited from 25.5% government control and letters of comfort from the state-owned holding Samruk-Kazyna.

The principal methodologies used in rating of House Construction Savings Bank of Kazakhstan are “Bank Financial Strength Ratings: Global Methodology” and “Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology”, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.

The principal methodologies used in rating the four GRIs – Development Bank of Kazakhstan, KazAgroFinance, Agrarian Credit Corporation and Kazakhstan Mortgage Company – are “The Application of Joint-Default Analysis to Government Related Issuers”.

Other methodologies and factors that may have been considered in the process of rating these entities can also be found in the Credit Policy & Methodologies directory. 

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