Moody’s downgrades Kazkommertsbank (Kazakhstan) ratings

September 18. KASE

Moody's downgrades Kazkommertsbank (Kazakhstan) ratingsMoody’s Investors Service has today downgraded Kazkommertsbank’s (KKB) following ratings, due to the sharp increase in negative pressures on KKB’s credit profile:

– local and foreign-currency deposit ratings to B2 from Ba3;
– foreign-currency senior unsecured debt rating to Caa1 from B2;
– foreign-currency subordinated debt rating to Caa2 from B3; and
– foreign-currency junior subordinated debt rating to Caa3 (hyb) from Caa1 (hyb).

At the same time, Moody’s downgraded KKB’s standalone bank financial strength rating (BFSR) to E, mapping to caa1 on the long-term scale, from E+/b2. KKB’s debt and deposit ratings carry a negative outlook, the outlook on the BFSR is stable.

RATINGS RATIONALE

Moody’s downgrade of KKB’s ratings reflects the sharp increase in negative pressures on KKB’s credit profile, driven by (1) its weakening liquidity position over the past year, with liquid assets declining to about 10% of its total assets as of end-H1 2012 from 20% as of end-H1 2011, according to the bank’s unaudited regulatory reports; (2) ongoing deterioration of asset quality, as problem loans exceeded 45% of the bank’s gross loans as of end-H1 2012 from about 40% at year-end 2011, based on Moody’s estimates; whereas loan loss reserves of 24.9% at end-H1 2012, according to the IFRS report, are unlikely be insufficient to cover all expected credit losses; and (3) eroding profitability as the bank would barely break-even in H1 2012 if a dividend income of KZT8.2 (about $55 million) representing a one-off event were to be excluded from its earnings. KKB’s profitability is likely to remain depressed in the medium-term given the declining earnings (due to stagnant loan growth) and significant levels of loan-los provisions that are still needed to be recognized. Although the bank’s total capital adequacy ratio of 22.3% at year-end 2011, according to its IFRS financial statements, is significantly above the required minimum of 10%, KKB’s capitalization ratio is likely to weaken materially in the near-to-medium term once the bank accounts the full extent of its asset quality problems at a time of diminished earnings.

KKB’s ratings also reflect its status of the country’s largest bank. Therefore, Moody’s incorporates moderate systemic support probability in the bank’s B2 deposit ratings, which provides two notches of uplift from KKB’s caa1 standalone rating. However, Moody’s does not assume any systemic support in KKB’s debt ratings, which reflects the Kazakh government’s track record of not providing support to debt holders of systemically important banks in rescue programmes.

WHAT COULD MOVE THE RATINGS UP/DOWN

KKB’s BFSR has limited upside potential in the medium term, reflected in the negative outlook. However, a change in the outlook to stable could be prompted by stabilisation in the bank’s asset quality, liquidity and profitability.

KKB’s rating may be downgraded if its liquidity position, asset quality trends and capitalisation level deteriorate beyond what is currently anticipated and thus raise concerns about the sustainability of its franchise without external support.

PRINCIPAL METHODOLOGIES

The principal methodology used in this rating was Moody’s Consolidated Global Bank Rating Methodology published in June 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Almaty, Kazakhstan, KKB reported total assets and net income of USD17 billion and USD87.7 million, respectively, as at end-H1 2012 according to the bank’s IFRS financial statements.

http://www.kase.kz/en

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