S&P downgrades Nurbank (Kazakhstan) ratings; outlook Stable
January 27. KASE
Standard & Poor’s Ratings Services said today it lowered its long-term counterparty credit rating on Kazakhstan-based JSC Nurbank to ‘B-‘ from ‘B’ and the Kazakhstan national scale rating to ‘kzBB-‘ from ‘kzBB+’. We also affirmed our ‘C’ short-term counterparty credit rating on the bank. We are removing the ratings from CreditWatch, where they were placed with negative implications on Dec. 12, 2011. The outlook is stable. At the same time, we lowered the ratings on Nurbank’s dated subordinated debt issues to ‘CCC’ from ‘CCC+’ and to ‘kzCCC+’ from ‘kzB’.
The downgrade reflects our assessment of the bank’s “moderate” business position, “adequate” capital and earnings, “weak” risk position, “average” funding, and “adequate” liquidity, as our criteria define these terms. The stand-alone credit profile (SACP) is ‘b-‘.
Our assessment of Nurbank’s business position as “moderate” reflects its small and declining market share and high exposure to the domestic real estate and construction sectors. With a market share of about 2% based on assets, Nurbank is the No. 13 bank in Kazakhstan as of Dec. 1, 2011.
We view Nurbank’s capital and earnings as “adequate,” based on weakening of our projected risk-adjusted capital (RAC) ratio before adjustments to about 8.3% – 8.8% over the next 12-18 months.
Our assessment of Nurbank’s risk position as “weak” reflects our view of the bank’s historically relaxed underwriting standards, significant loss experience, and high concentration of lending in real estate and construction sectors, despite 52% coverage of total loans by loan-loss reserves and capital as of Dec. 1, 2011. Nurbank’s asset quality materially deteriorated in 2011: Nonperforming loans (NPLs; more than 90 days overdue) increased to 28.5% of total loans on Dec. 1, 2011, from 9.0% at year-end 2010. About two-thirds of total loans had been restructured as of Dec. 1, 2011. Nurbank has a very high share of loans in a grace period. We expect an increase in NPLs over the coming quarters as the grace periods for many of the bank’s loans end. We anticipate that Nurbank will need to create significant additional loan-loss reserves in 2012. Nurbank’s share of lending to the weak construction, real estate, property development, hotel, and restaurant sectors is almost twice the system average, at 39% of total lending as of Dec. 1, 2011.
Nurbank’s funding is “average” and its liquidity is “adequate,” in our view. The stable outlook reflects our view that Nurbank will maintain its current capitalization and liquidity over the next 12 months, despite our expectation of asset quality deterioration.
We would lower the ratings if the bank’s liquidity weakened substantially or if our projected RAC ratio before adjustments declined to less than 5%, owing to significant additional provisions not supported by capital injections.
We could raise the ratings if Nurbank demonstrated a sustainable and material improvement in asset quality and substantially decreased its share of lending to construction and real estate sectors and its share of loans in grace periods.