Moody’s downgrades to Caa2 BTA Bank (Kazakhstan) long-term deposit ratings

December 7. KASE

Moody's downgrades to Caa2 BTA Bank (Kazakhstan) long-term deposit ratingsMoody’s Investors Service has today downgraded BTA Bank’s (BTA) long-term local and foreign-currency deposit ratings to Caa2 from B3, the long-term foreign-currency senior unsecured debt rating to Ca from Caa2 and the long-term foreign-currency subordinated debt rating to C from Caa3.

The downgrades were prompted by Moody’s assessment that BTA’s credit profile has weakened, reflecting a lack of a return to profitability, a capital deficit and a possible further debt restructuring.

Concurrently, BTA’s standalone E bank financial strength rating (BFSR) has been affirmed. However, Moody’s now maps the E BFSR to Ca on the long-term rating scale from Caa2 previously. The BFSR and the subordinated debt rating carry a stable outlook, whilst the outlook is developing on the senior unsecured debt and deposit ratings.

RATINGS RATIONALE

Moody’s says that the downgrades reflect the ongoing weakening of BTA’s credit profile and the increased risks that it might not be able to meet its obligations in the short-to-medium term. Despite the restructuring of BTA’s market borrowings – with an approximate 70% haircut for creditors in September 2010 – BTA has been unable to return to profitability and recover its capital. According to BTA’s IFRS report, the capital deficit was USD1.48 billion (12.2% of the total assets) as of end-H1 2011.

Moody’s estimates that only around 20%-25% of BTA’s loan book currently generates cash earnings; therefore, its operating activity is persistently depleting its liquidity reserves. The only sources of replenishing liquidity are new deposits and loan repayments, which renders its liquidity position unsustainable. Moody’s believes that the lack of capital and recurring income and cash flows increases the possibility that BTA may have to restructure its debt again to restore capitalisation and reduce funding costs. Under that scenario, we estimate that the possible losses for BTA’s senior debt holders may range between 30%-50%.

Moody’s notes that BTA is currently controlled by the Kazakhstan government through the Sovereign Wealth Fund “Samruk-Kazyna”, and that the Fund has supported the bank – in terms of capital and liquidity – during the global financial crisis. Therefore, Moody’s assessment incorporates a moderate probability that systemic support would be extended to BTA’s depositors in case of need. As a result, BTA’s long-term Caa2 deposit ratings currently benefit from a two-notch uplift from the Ca standalone credit strength.

However, Moody’s does not include any systemic support in the bank’s debt ratings, reflecting the country’s lack of support to debt holders during the crisis. Consequently, BTA’s senior unsecured debt rating is in line with its Ca standalone credit strength. The C debt rating assigned to BTA’s subordinated debt is one notch below the Ca senior unsecured ratings assigned to its senior unsecured debt, and reflects claims subordination.

The developing outlook assigned to the senior unsecured debt and deposit ratings reflects the possibility of both upwards and downwards rating movements over the next 12 to 18 months.

WHAT COULD CHANGE THE RATING – UP

In the medium-term, the debt ratings may be upgraded if BTA is able to improve its financial performance, or if the losses for its bondholders from a possible debt restructuring are less than what is currently anticipated. Similarly, the deposit rating may benefit from an improvement in BTA’s financial performance.

WHAT COULD CHANGE THE RATING – DOWN

BTA’s debt ratings may be downgraded if the losses for its bondholders from a possible debt restructuring exceed 50% of their investments. BTA’s deposit ratings could be downgraded if it defaults on its deposits.

PRINCIPAL METHODOLOGIES

The methodologies used in this rating were Bank Financial Strength Ratings: Global Methodology published in February 2007, and Incorporation of Joint-Default Analysis into Moody’s Bank Ratings: A Refined Methodology published in March 2007. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Almaty, Kazakhstan, BTA reported total assets and total equity deficit of USD12.2 billion and USD1.48 billion, respectively, at end-H1 2011, according to the bank’s IFRS financial statements. BTA’s net loss for H1 2011 amounted to USD701 million.

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