S&P rates Kazakh Bank Centercredit ‘B+/B’;outlook stable
Dec 28. Reuters
– Standard & Poor’s has assigned its ‘B+/B’ long- and short-term counterparty credit ratings to JSC Bank Centercredit (BCC) under its revised bank criteria (published on Nov. 9, 2011). The outlook is stable.
– Our ratings on BCC reflect our ‘bb-‘ anchor for commercial banks operating only in Kazakhstan, the bank’s adequate business position, weak capital and earnings, moderate risk position, average funding, and adequate liquidity.
– The ratings also take into account our view of BCC as being of moderate systemic importance in a supportive country.
– The stable outlook reflects our expectation that BCC’s financial and business profiles are likely to remain unchanged over the next 12-24 months.
Standard & Poor’s Ratings Services assigned its ‘B+’ long-term and ‘B’ short-term counterparty credit ratings to Kazakhstan-based JSC Bank Centercredit (BCC). We also assigned our ‘kzBBB’ Kazakhstan national scale rating to the bank. The outlook is stable.
The ratings on BCC reflect the bank’s “adequate” business position, “weak” capital and earnings, “moderate” risk position, “average” funding, and “adequate” liquidity, as our criteria define these terms. The ratings also take into account our view of the bank as being of moderate systemic importance in a supportive country. The stand-alone credit profile (SACP) is ‘b’.
Under our bank criteria, we use our Banking Industry Country Risk Assessment’s economic risk and industry risk scores to determine a bank’s anchor, the starting point in assigning an issuer credit rating. Our anchor for a commercial bank operating only in Kazakhstan is ‘bb-‘. Kazakhstan’s economic risk score of ‘8’ reflects the economy’s concentration in natural resources and the high risk in economic imbalances that resulted in an overheated credit and real estate boom in 2003-2007, which was largely funded with cross-border borrowing. Extremely high credit risk reflects Kazakh banks’ aggressive lending practices and underwriting standards and a weak payment culture and rule of law. The industry risk score of ‘8’ is based on our assessment of weak governance and transparency, and high incidence of corruption and fraud in Kazakhstan. It also reflects the weak and unstable nature of the banking system and structural deficiencies in systemwide funding. Reliance on foreign funding has fallen, but state-influenced deposits remain critical for liquidity.
We assess BCC’s business position as “adequate”. BCC has a sizable market share of about 8% in total lending and about 14% in retail deposits; a diversified business focusing on corporate clients, small and midsize enterprises, and retail customers; and an experienced management team. The bank is the fifth largest in Kazakhstan by total assets (as of Sept. 30, 2011). As of June 30, 2011, corporate loans comprised 66% of BCC’s total loans and retail loans accounted for 34% of the loan portfolio. Mortgage loans accounted for 51% of the retail lending portfolio, with the rest being consumer loans and development loans for small businesses. The bank aims to moderately expand its uncollateralized consumer lending. The involvement of Kookmin Bank (A/Stable/A-1) and International Finance Corp. (AAA/Stable/A-1+),which respectively own 41.93% and 10% of BCC’s capital as of June 30, 2011, should help to strengthen BCC’s corporate governance, strategy, underwriting, and risk management systems. Kookmin Bank has two experienced bankers serving on BCC’s supervisory board and four senior managers on the management board, who help to train BCC’s middle and senior management and improve its internal systems and processes.
Our assessment of BCC’s capital and earnings as “weak” reflects our projected risk-adjusted capital (RAC) ratio before adjustment for diversification for BCC of between 4.5% and 4.9% over the next 24 months. Although currently the bank meets all regulatory requirements regarding capital adequacy, we consider its capital weak and unable to withstand a significant deterioration of loan portfolio quality. Also, high credit losses and a high share of low-income liquid assets have led to weak profitability in recent years. In the first half of 2011, profitability improved slightly, as shown by an increase in the net interest margin to a still low 1.9% as of June 30, 2011, from 1.3% at year-end 2010. As of Dec. 31, 2010, BCC reported a positive financial result of only Kazakhstani tenge (KZT) 1,222 million (about $8.3 million) compared with a net loss of KZT30, 669 million (about $208 million). We expect profitability to increase slowly in the medium term, in light of the bank’s efforts to improve operating efficiency and dispose of unprofitable liquid assets. At the current level, the bank’s profit is unlikely to provide sufficient loss absorption capacity should the quality of the loan portfolio deteriorate sharply.
In our view, BCC’s risk position is “moderate”, mainly owing to sizable lending concentrations in the corporate loan portfolio; the top 20 borrowers account for 30% of the total loan portfolio and a high 300% of total equity. Given that about one-quarter of the top 20 exposures are problematic or restructured, and total loan loss coverage for those exposures is rather low, significant deterioration of loan portfolio quality could put pressure on capitalization. About one-third of BCC’s liabilities and about 36% of the loan portfolio are in foreign currency. This match somewhat mitigates currency risk for the bank. However, we consider a high share of foreign currency lending to be a potential source of additional credit risk in the event of significant adverse exchange rate fluctuations. The bank has demonstrated a better loss experience than peers’. BCC’s nonperforming loans (NPLs) accounted for 8.7% of its total loan portfolio and provisions 15.6%, compared with 29.5% and 32.9%, respectively, on average in the Kazakh banking sector as of Sept. 30, 2011. However, we note an increase in reported NPLs to 9.2% as of June 30, 2011, from 8.7% at year-end 2010 and 3.2% at the end of 2009. The quality of the portfolio has subsequently improved: As of Sept. 30, 2011, NPLs accounted for 8.7% of total loans. However, the development of portfolio quality raises concerns and may mean that the bank is not yet on a steady course toward improving asset quality.
BCC’s funding is “average” and its liquidity is “adequate”, in our opinion. Customer deposits have been a strong funding source in recent years and accounted for 70% of total funding on June 30, 2011. With the 20 largest depositors representing about 22% of all deposits, funding is somewhat concentrated. Nevertheless, the bank’s reliance on wholesale funding is reasonable, with the loan-to-deposit ratio at 100% as of June 30, 2011. The share of liquid assets-including cash, short-term placements, and securities eligible for sale and repurchase transactions-accounted for about 28% of BCC’s total assets, which compares well with that of peer banks in Kazakhstan.
Given BCC’s sizable market share in lending and retail deposits, we consider BCC to have “moderate” systemic importance in Kazakhstan. We consider that there is a “moderate” likelihood that BCC would receive extraordinary support from the government if needed, which provides a rating uplift of one notch above the SACP.
The stable outlook reflects our expectation that BCC’s financial profile will remain stable over the next two years.
We anticipate that weak profitability will gradually improve, reflecting the bank’s efforts at enhancing operational efficiency, developing more profitable lines of business, such as consumer lending, increasing the loan portfolio by 5%-10% in the near term, and further enhancing its internal systems and processes with the close involvement of Kookmin Bank.
We could take a positive rating action if Kookmin Bank acquired a controlling stake in BCC, consolidated BCC in its accounts, and demonstrated an increased willingness to provide financial support to BCC. We could also take a positive rating action if BCC demonstrated stronger portfolio quality and shifted the focus of its efforts from recovery to new business generation, which could lead to a sustainable improvement of profitability that would strengthen capitalization.
We could lower the ratings if asset quality deteriorated sharply, causing us to revise our assessment of BCC’s risk position to “weak”, or if the bank’s business position weakened significantly, affecting its funding base and our assessment of its “moderate” systemic importance.