S&P ups Kazakh Agrarian Credit Corp. to ‘BB+’; otlk stbl

Mar 06. Reuters

S&P ups Kazakh Agrarian Credit Corp. to 'BB+'; otlk stbl– Following a review of Kazakh Agrarian Credit Corp. (KACC) under our revised bank criteria (published on Nov. 9, 2011), we have raised our long-term and national scale ratings on KACC to ‘BB+/kzAA-‘ from ‘BB/kzA+’ and affirmed the short-term rating at ‘B’.

– Our ratings on KACC reflect our view of a high probability of timely and sufficient extraordinary support from the Kazakh government, KACC’s ultimate owner.

– The stand-alone credit profile is ‘b+’ reflecting our ‘bb-‘anchor for a bank operating in Kazakhstan, KACC’s moderate business position, very strong capital and earnings, moderate risk position, below average funding, and moderate liquidity.

– The stable outlook reflects our expectation of continued strong ongoing government support to KACC, which we think will result in maintenance of its business and financial profile.

Rating Action

On March 6, 2012, Standard & Poor’s Ratings Services raised its long-term issuer credit rating on Kazakh Agrarian Credit Corp. (KACC) to ‘BB+’ from ‘BB’ and affirmed the ‘B’ short-term issuer credit rating. The outlook is stable. We also raised the Kazakhstan national scale rating to ‘kzAA-‘ from ‘kzA+’.


The ‘BB+’ long-term rating on KACC reflects its stand-alone credit profile (SACP), which we assess at ‘b+’, along with our opinion of a “high” likelihood that KACC would receive timely and sufficient extraordinary support from the government of the Republic of Kazakhstan (BBB+/Stable/A-2; Kazakhstan national scale ‘kzAAA’), its 100% owner. The ‘b+’ SACP reflects KACC’s “moderate” business position, “very strong” capital and earnings, “moderate” risk position, “below-average” funding, and “moderate” liquidity, as our criteria define these terms.

In accordance with our criteria for government-related entities, our opinion of a “high” likelihood of extraordinary government support for KACC is based on our view of the company’s:

– “Important” role for the government. As a government instrument to subsidize the politically and socially important agricultural sector, KACC carries out a public-policy-based mandate of providing cheap credit to agricultural and nonagricultural businesses in rural areas throughout Kazakhstan. Furthermore, because KACC is present in 158 out of 177 districts in the country, is responsible for a large share of the total loans provided to agricultural producers in Kazakhstan, and has accumulated significant expertise in the sector, its functions cannot be performed easily by any other entity.

– “Very strong” link with the Kazakh government. Kazakhstan’s government wholly owns KACC through KazAgro Holding (not rated), and privatization is not on the agenda. The government tightly monitors KACC’s activities through KazAgro.

As a result, our rating on KACC is three notches higher than its SACP, which we assess at ‘b+’.

We use our bank criteria to assess KACC’s SACP.

Under our bank criteria, we use our Banking Industry Country Risk Assessment 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 financial institution operating only in Kazakhstan is ‘bb-‘, based on an economic risk score of ‘8’ and an industry risk score of ‘8’.

Kazakhstan’s economy relies heavily on natural resources and displays imbalances resulting from a credit and real estate boom in 2003-2007 that was funded largely through cross-border borrowing. We consider Kazakh banks to have aggressive lending practices and underwriting standards and that the country shows a weak payment culture and rule of law, all of which translate into extremely high credit risk in our view.

With regard to industry risk, in our assessment, Kazakhstan displays weak governance and transparency, and there is a high incidence of corruption and fraud. We also consider the banking system to be weak and unstable and see structural deficiencies in systemwide funding. Banks’ reliance on foreign funding has fallen, but state-influenced deposits remain critical for liquidity.

Our assessment of KACC’s business position as “moderate” balances its small absolute size and concentration in agriculture with its public policy role of supporting lending to the agricultural sector in rural areas. With total loans of Kazakhstani tenge (KZT) 94.4 billion ($630 million), KACC compares in size with banks in the smaller half of Kazakhstan’s 38 banks. KACC is responsible for about 17% of lending to agricultural (mostly grain) producers in Kazakhstan and has accumulated significant expertise in the sector, meaning its functions cannot be performed easily by another entity, which limits potential competition. Moreover, Kazakh commercial banks lend to much larger agricultural companies than KACC’s does, and KACC’s clients include mutual credit associations.

The company is developing its risk-management procedures, but high turnover of senior management might affect its growth strategy in the medium term.

Our assessment of KACC’s capital and earnings as “very strong” reflects a projected risk-adjusted-capital ratio before adjustments of about 25%-27% over the next 12-18 months. Capitalization is supported by regular government capital injections and our expectation that the government will provide an additional KZT4 billion in capital in 2012. At the same time, the bank’s profitability is low. We expect a positive earnings trend in the medium term, supported by a healthy net interest margin and strict cost controls. The three-year average earnings buffer is positive.

Our assessment of KACC’s risk position as “moderate” reflects KACC’s still developing risk-management framework, above-system-average loan growth, and lending concentration in the cyclical and weather dependent agricultural sector (almost 90% of total loans). KACC’s asset quality compares well with the Kazakhstan banking-sector average. At year-end 2011, reported nonperforming loans (over 90 days overdue) constituted 9.8% of total loans compared with the sector average of 31%. An additional 11% of KACC’s loans were restructured at year-end 2011. Combined provisions and capital covered 79% of total loans at year-end 2011. Single-name concentrations compare well against the sector average, with the share of the 20 top borrowers at 65% of adjusted total capital at year-end 2011.

According to our assessment, KACC’s funding is “below average” and liquidity is “moderate”. KACC does not have access to a central bank funding mechanism, nor does it have a deposit license. It is funded primarily by budget loans provided via KazAgro (55% of total funding at year-end 2011), a KZT6.5 billion loan outstanding from Commerzbank AG (A/Negative/A-1; 23%), and KZT5.3 billion in domestic senior unsecured bonds (19%). The company regularly receives budget loans. In 2011 it received KZT39 billion and in 2012 another KZT39 billion is expected. As of year-end 2011, KACC’s cash stood at KZT5.1 billion ($34 million) in current accounts in the largest Kazakh banks. This is sufficient to repay $7.5 million in February 2012 on the Commerzbank loan. The remaining $31 million outstanding on the loan is to be gradually repaid during 2012-2013. The loan contains some covenants, which we do not expect KACC to violate.


The stable outlook reflects our expectation of continued strong ongoing government support to KACC, resulting in maintenance of its “very strong” capitalization levels and “moderate” liquidity. It also reflects our assessment that KACC can continue to expect a “high” likelihood of timely and sufficient extraordinary government support.

A stronger probability of extraordinary support might lead to positive rating actions on KACC.

Negative rating actions on the sovereign, or signs of a lower probability of extraordinary government support, might result in negative rating actions on KACC. Deterioration of the stand-alone credit profile, with sharply weaker capitalization or growing problem assets in KACC’s portfolio, might also result in negative rating actions, although we do not think it is likely.

Ratings Score Snapshot

Issuer Credit Rating BB+


Anchor bb-

Business Position Moderate (-1)

Capital and Earnings Very strong (+2)

Risk Position Moderate (-1)

Funding and Liquidity Below average and Moderate (-1)

Support +3

GRE Support +3

Group Support 0

Sovereign Support 0

Additional Factors 0

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.

– Banks: Rating Methodology And Assumptions, Nov. 9, 2011

– Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011

– Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010

– Bank Capital Methodology And Assumptions, Dec. 6, 2010

Ratings List


To From

Kazakh Agrarian Credit Corp.

Long-Term Issuer Credit Rating BB+/Stable BB/Stable

Kazakhstan National Scale Rating kzAA-/-/- kzA+/-/-

Senior Unsecured (3 issues) BB+ BB

Senior Unsecured (3 issues) kzAA- kzA+

Ratings Affirmed

Kazakh Agrarian Credit Corp.

Short-Term Issuer Credit Rating -/-/B