S&P affirms Temirbank (Kazakhstan) ratings; outlook Stable

September 26. KASE

S&P affirms Temirbank (Kazakhstan) ratings; outlook StableStandard & Poor’s Ratings Services said today that it had affirmed its ‘B/B’ long- and short-term counterparty credit ratings on Kazakhstan-based Temirbank JSC. The outlook is stable. At the same time, the Kazakhstan national scale rating was affirmed at ‘kzBB’.

The affirmation of the ratings on Temirbank acknowledges the gradual recovery of Temirbank’s financial profile, in line with our expectations.

Temirbank demonstrated improved core profitability with positive preprovision income as of year-end 2011 and in the first half of 2012. Therefore, we are removing our one-notch negative adjustment for poor earnings capacity.

The bank’s equity was adjusted for sizable tax loss carryforwards. As a result, risk-adjusted capital (RAC) before diversification at year-end 2011 amounted to 9.8%. We forecast it will be at about 9% within the next 12-24 months. We have consequently revised our capital assessment downward to “adequate” (range of 7%-10%) from “strong” (above 10%).

The ratings on Temirbank reflect 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 now ‘b-‘.

We classify Temirbank as a government-related entity (GRE). In our opinion, there is a “moderate” likelihood that Kazakhstan’s government would provide timely and extraordinary support to Temirbank in the event of financial distress. In accordance with our criteria for GREs, we based this opinion on the bank’s “strong” link with the government and “limited importance” to Kazakhstan’s economy.

Based on these factors, and according to our criteria, the long-term rating on Temirbank benefits from one notch of uplift above its ‘b-‘ SACP.

The ‘CCC+’ rating on Temirbank’s dated subordinated debt bank note program is two notches below the final issuer credit rating of ‘B’, in accordance with our criteria for nondeferrable capital instruments.

The stable outlook reflects our expectation that Kazakhstan’s government will continue to provide support to Temirbank as the bank cleans its loan book and diversifies its funding base. Given the amount of problem loans the bank has, we expect nonperforming loans to decline only gradually over the next 12 months.

If we perceived that the government’s stance toward the bank is no longer consistent with a “moderately high” likelihood of support, we would remove the one notch of uplift that we currently factor into the ratings. We could also consider lowering the ratings if we observed further deterioration in asset quality in the next 12 months. This could happen if the quality of newly originated loans were weak, reflecting relaxed underwriting practices. At the same time, a potential merger with weaker Alliance Bank JSC (B-/Stable/C; Kazakhstan national scale ‘kzBB-‘) could worsen the risk profile of the newly formed entity. However, we see this merger as a long-term process and don’t currently factor its impact on our ratings and outlook on Temirbank.

We could raise the ratings if Temirbank demonstrated a significant and sustainable improvement in asset quality, with a material reduction in problematic assets, which would improve its risk position. An improvement in capitalization, with RAC above 10% caused by earnings growing faster than risk-weighted assets, could be positive for the ratings, as well.