Fitch upgrades Kazkommertsbank, Bank Centercredit, affirms Halyk, ATF, Kaspi

April 19. Reuters

Fitch upgrades Kazkommertsbank, Bank Centercredit, affirms Halyk, ATF, KaspiFitch Ratings has upgraded the Long-Term Issuer Default Ratings (IDRs) of Kazkommertsbank (KKB) to ‘B’ from ‘B-‘, and Bank Centercredit (BCC) to ‘B+’ from ‘B’. The agency has also affirmed the Long-term IDRs of three other Kazakh banks, namely ATF Bank at ‘BBB’, Halyk Bank of Kazakhstan at ‘BB-‘ and Kaspi Bank at ‘B-‘.

At the same time, Fitch has upgraded the Long-term IDR of BCC-Moscow, the Russian subsidiary of BCC, to ‘B+’ from ‘B’, and affirmed KKB’s subsidiary Moskommertsbank (MKB) at ‘B-‘. All of the Long-term IDRs carry a Stable Outlook, with the exception of ATF, which has a Negative Outlook. A full rating breakdown is provided at the end of this commentary.

Fitch continues to regard the Kazakh banking sector as weak, but stable, as reflected in the generally low rating levels and the prevailing rating Outlook. In Fitch’s view, the benign macroeconomic environment and increasing government support for troubled industries could somewhat ease deep-seated asset quality problems, which remain the sector’s major weakness. Nevertheless, reported non-performing loans are likely to remain volatile as previously restructured exposures mature, and banks in some cases take a tougher stance on problem borrowers. The domestic real estate market, which is the key asset quality driver for Kazakh banks, has been gradually stabilising as sales volumes and house prices have bottomed out. However, a stronger recovery, and hence a major improvement in banks’ loan quality, is unlikely to happen soon given still weak demand for real estate assets.

Banks’ liquidity cushions are generally comfortable, supported by inflows of retail deposits and still high levels of funding from state-owned companies and government agencies. Refinancing risk is moderate as banks have reduced their stock of external debt and do not face significant repayment spikes. The quality of revenues has been improving as a result of some banks (namely Halyk, ATF and BCC) discontinuing interest accruals on potentially problematic loans, and more active balance sheet management has resulted in banks reporting positive pre-impairment profit on a cash basis.

KKB’s upgrade reflects a reassessment of the bank’s default risk, given its track record of debt repayments over almost five years since the banking crisis began in Kazakhstan; the currently comfortable liquidity position and limited near-term refinancing risk; considerable government support for the bank’s funding; and regulatory forbearance in respect to the bank’s loan impairment recognition and reserve levels. Positive, albeit modest, pre-impairment profit (net of accrued interest) and material loss absorption capacity are also positive for the bank’s credit profile. Fitch estimates that, at end-2011, KKB could have increased its IFRS reserves to 36% of the loan book, from an actual level of 24%, and still maintained a Basel total capital ratio of 10%.

At the same time, KKB’s asset quality remains very weak, and in Fitch’s view problems are somewhat greater than the reported non-performing loans (24.5% at end-2011) and restructured loans (18.5%) suggest. A review of the bank’s largest exposures representing a bulk of the loan book suggests that the majority of these relate to the real estate and construction sector, with a significant portion showing clear signs of impairment and having had problems servicing interest in full, at least in the past; and only in a limited number of cases principal has been reducing.

Fitch does not expect significant improvement in KKB’s asset quality in the near to medium term, meaning that stability of the bank’s deposit funding is key to its continued ability to service its debt.

Further upside for KKB’s ratings is very limited given the extent of its asset quality problems, and would require considerable progress with loan work outs, or a recapitalisation of the bank. Any indication from the Kazakh authorities and/or KKB’s major shareholders that creditors might be expected to participate in actions to help strengthen the bank’s solvency (not the agency’s base case expectation at present) could result in a downgrade.

MKB’s ratings are driven by potential support from KKB. The one notch difference between KKB’s and MKB’s Long-term IDRs reflects Fitch’s concerns about the absence of any well-defined plans to provide capital to MKB, and its limited strategic importance and integration with the parent. MKB’s standalone profile is burdened by its persistent pre-impairment losses, the potential need for further provisioning of the loan book and frequent recent changes in management and strategy.

MKB’s ratings could be upgraded to the level of its parent in case of a recapitalisation of the bank and the implementation of a viable strategy. The ratings could come under downward pressure if the bank’s capital base continues to be eroded without parental support coming in.

BCC’s upgrade reflects the bank’s improved management and performance, in part as a result of the more active involvement of representatives of the bank’s major shareholder, Korea’s Kookmin Bank (rated ‘A’ with a Stable Outlook by Fitch), as well as the stabilisation of asset quality. BCC’s granular deposit base, reasonable liquidity and manageable wholesale repayments also underpin the ratings. BCC finally started to address its balance sheet weaknesses in 2011 and repaid expensive corporate deposits which previously generated significant negative carry. The margin improvement was modest but coupled with better quality of revenues it turned BCC’s cash margin (i.e. adjusted for accrued interest) positive.

BCC’s loss absorption capacity is more moderate than peers, but seems to be reasonable in the context of current asset quality problems and improving underwriting. At end-2011, Fitch calculates that the bank could have almost fully reserved its non-performing and restructured loans (a combined 20% of the book) while maintaining a Basel total capital ratio of 10%. Better quality of revenues suggests that loan performance is gradually getting closer to reported metrics.

BCC’s ratings could be upgraded by several notches, potentially to investment grade, if Kookmin consolidates a majority stake in the bank and affirms its strategic commitment to BCC. The ratings could come under downward pressure if asset quality deteriorates further and the recent moderate improvements in performance are reversed.

BCC-Moscow’s IDR is equalised with that of BCC as the subsidiary is highly integrated with the parent and heavily dependent on BCC on the funding side. The bank is small and plans to develop gradually, which should limit the potential amount of any support required.

Halyk’s ratings reflect its solid franchise, stable deposit base, strong liquidity and solid pre-impairment profitability. Concerns over the bank’s asset quality and adequacy of loan impairment provisions are less acute than for other banks given Halyk’s significant loss absorption capacity, solid internal capital generation and the much improved quality of revenues, with no reported accrued interest in 2011. Risks arising from the bank’s funding concentration (the largest group of depositors provided 20% of liabilities at end-2011) are offset by the significant liquidity cushion and absence of near-term major wholesale repayments.

Upside potential for Halyk’s ratings is currently limited and would require far greater progress with working out the bank’s problem loan exposures. Further asset quality deterioration could put downward pressure on the ratings.

ATF Bank’s (ATF) ‘BBB’ Long-Term IDR is driven by potential support from its ultimate parent UniCredit S.p.A. (UC; rated ‘A-‘ with a Negative Outlook). Fitch’s view of support takes account of the track record of capital assistance to date, ATF’s small size relative to the broader group and the potential negative impact of a default at ATF on UC’s broader franchise in emerging Europe. Fitch believes a sale of ATF is unlikely in the near term, and expects UC to continue supporting the subsidiary as long as it remains the major shareholder. At the same time, ATF is rated two notches below its ultimate parent to reflect what Fitch views as the bank’s low strategic importance to the group.

ATF’s ‘b-‘ Viability Rating reflects its weak asset quality, which undermines capitalisation and profitability, and high business concentrations. The rating also incorporates somewhat stronger risk management compared to privately-owned local peers as a result of greater integration with its parent, and material credit protection provided by UC which supports the capital position.

ATF could be downgraded if UC’s ratings are lowered. A downgrade is also possible if Fitch believes that further support from UC has become less likely, or if a disposal of the subsidiary is being more actively pursued.

Kaspi’s ratings remain constrained by its still not fully tested business model focused on unsecured consumer lending, the potential need to create further reserves against the corporate portfolio, moderate capital level, a lumpy deposit base. Kaspi has grown extremely rapidly in its consumer lending niche over the last three years. However, its track record is still limited, as is the sophistication of risk-management. Losses have been reasonable to date of the high-yield consumer lending business of Kaspi, but the sustainability of this performance still seems questionable to Fitch, especially if the economy worsens.

The strong growth of the high margin retail business underpins Kaspi’s pre-impairment profitability, and the short maturities of these loans mitigate liquidity risk, stemming from high concentration in deposit base. A longer track record in retail lending, greater diversification of funding might generate upside for Kaspi’s ratings. A marked deterioration in retail loan performance could put downward pressure on the ratings.

The ratings actions are as follows:


-Long-Term foreign and local currency IDRs upgraded to ‘B’ from ‘B-‘; Outlook Stable;

-Short-Term foreign and local currency IDRs affirmed at ‘B’;

-Support Rating affirmed at ‘5’; 

-Viability Rating Upgraded to ‘B’ from ‘B-‘;

-Support Rating Floor affirmed at ‘B-‘;

-Senior unsecured debt upgraded to ‘B’ from ‘B-‘; Recovery Rating ‘RR4’

-Senior unsecured debt programme short-term rating: affirmed at ‘B’;

-Subordinated debt upgraded to ‘CCC’ from ‘CC’; Recovery Rating ‘RR6’;

-Tier 1 perpetual subordinated notes upgraded to ‘CCC’ from ‘CC’; Recovery Rating ‘RR6’.


-Long-term foreign currency IDR: upgraded to ‘B+’; Outlook Stable

-Short-term foreign currency IDR affirmed at ‘B’;

-Viability Rating: upgraded to ‘B+’ from ‘B’;

-Support Rating affirmed at ‘5’;

-Senior unsecured debt upgraded to ‘B+’ from ‘B’; Recovery Rating ‘RR4’.


-Long-term foreign currency IDR affirmed at ‘BBB’; Outlook Negative;

-Short-term foreign currency IDR affirmed at ‘F3’;

-Long-term local currency IDR affirmed at ‘BBB’; Outlook Negative;

-National Long-term Rating affirmed at ‘AA+(kaz)’; Outlook Negative;

-Viability Rating affirmed at ‘b-‘;

-Support Rating affirmed at ‘2’;

-Senior unsecured debt affirmed at ‘BBB’;

-National senior unsecured debt rating: affirmed at ‘AA+(kaz)’;

-Subordinated debt affirmed at ‘BBB-‘;

-National subordinated debt: affirmed at ‘AA(kaz)’.

Halyk Bank of Kazakhstan

-Long-Term foreign and local currency IDRs affirmed at ‘BB-‘; Outlook Stable

-Short-Term foreign and local currency IDRs affirmed at ‘B’;

-Viability Rating affirmed at ‘bb-‘;

-Support Rating affirmed at ‘4’;

-Support Rating Floor affirmed at ‘B’;

-Senior unsecured debt affirmed at ‘BB-‘.


-Long-term foreign currency Issuer Default Rating affirmed at ‘B-‘; Outlook Stable

-Short-term foreign currency Issuer Default Rating affirmed at ‘B’

-Viability rating affirmed at ‘b-‘

-Support Rating affirmed at ‘5’

-Support Rating Floor affirmed at ‘No Floor’


Long-term foreign currency Issuer Default Rating affirmed at ‘B-‘; Outlook Stable

Short-term foreign currency Issuer Default Rating affirmed at ‘B’

National Long-term rating affirmed at ‘BB-‘(rus); Outlook Stable

Viability rating assigned at ‘ccc’

Support Rating affirmed at ‘5’


-Long-term foreign currency IDR upgraded to ‘B+’; Outlook Stable

-Long-term local currency IDR upgraded to ‘B+’; Outlook Stable;

-Short-term foreign currency IDR affirmed at ‘B’;

-National Long-Term Rating: upgraded to ‘A-(rus)’; Outlook Stable;

-Support Rating affirmed at ‘4’.