S&P assigns Kazakh ForteBank ‘kzBB’ national scale rating

Dec 27. Reuters

S&P assigns Kazakh ForteBank 'kzBB' national scale ratingOverview

– We are assigning a ‘kzBB’ Kazakhstan national scale rating to Kazakhstan-based ForteBank JSC.

– The rating on ForteBank JSC reflects the ‘bb-‘ anchor for a commercial bank operating only in Kazakhstan. The bank’s business and risk positions are negative rating factors, while capital and earnings, funding and liquidity are neutral for the rating.

– The rating includes no uplift for support from either shareholders or the government.

Rating Action

On Dec. 27, 2012, Standard & Poor’s Ratings Services assigned its ‘kzBB’ Kazakhstan national scale rating to ForteBank JSC.


The rating reflects the ‘bb-‘ anchor for banks operating in Kazakhstan, our view of the bank’s weaker business and risk positions than the system average, while capital and earnings, funding, and liquidity are neutral rating factors.

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 commercial bank operating only in Kazakhstan is ‘bb-‘.

Kazakhstan’s economic risk score of ‘8’ reflects the economy’s concentration in natural resources and the high risk in economic imbalances that resulted in an overheated credit and real estate boom in 2003-2007, which was largely funded with cross-border borrowing. Extremely high credit risk reflects Kazakh banks’ aggressive lending practices and underwriting standards and a weak payment culture and rule of law.

The industry risk score of ‘7’ is based on our assessment of weak governance and transparency and high incidence of corruption and fraud in Kazakhstan. It also reflects the weak and unstable banking system and the structural deficiencies in systemwide funding. Reliance on foreign funding has fallen, but state-influenced deposits remain critical for liquidity.

ForteBank’s business position is weaker than the industry average, in our view. It reflects the bank’s limited market share and customer franchise, as well as the short track record. As of Sept. 30, 2012, ForteBank (formerly Metrocombank) had total assets of Kazakhstani tenge (KZT) 33.4 billion ($223 million). The bank is a small player in Kazakhstan, with a market share of about 0.28% and ranking No. 27 by assets among Kazakhstan’s 38 banks.

ForteBank was initially established in 2007. In 2010 it was acquired by new shareholders, Bulat Utemuratov, holding 80.8%, and Timur Issatayev (president of the bank) holding 19.2%, who are associated with private equity fund Verny Investment Holding. The bank completely changed its strategy under the new management and currently focuses on servicing midsize and small corporate clients. In April 2012, the bank began rebranding and upgrading its branch network with a new format to better serve customer needs, as well as modernizing the information technology infrastructure. In 2012, ForteBank partially moved its headquarters to the new capital of Kazakhstan, Astana, from Almaty, motivated by better prospects for business development. We believe this new strategy has the potential to revitalize the brand and expand the commercial franchise, at a time when many Kazakh banks are not growing because they are wrestling with the work-out of nonperforming loans.

ForteBank demonstrated real loan growth of 20% for 2012, which is higher than the system average. This figure was less than the initially planned 80%, partially because of the relocation of the bank’s headquarters, the ongoing process of network rebranding, and the bank’s higher focus on qualitative lending growth. The bank has set a target of 70% average annual loan growth in the future, which is higher than the market average and which we consider to be rather challenging. The execution of the strategy and ForteBank’s capacity to attract and retain creditworthy customers still need to be demonstrated, in our view. We consider the bank’s quality of management and ongoing shareholder support to be rating strengths, compared with domestic banks of similar size, and believe the bank can benefit from this.

Our assessment of ForteBank’s capital and earnings is a neutral rating factor. We view ForteBank as a well-capitalized bank in a local context. The risk-adjusted capital (RAC) ratio before diversification was 13.8% as of year-end 2011. We project RAC before diversification of around 7%-7.5% within next 12-18 months, assuming targeted active loan growth and no planned capital injections in the near future. However, the shareholders are committed to providing support to the bank in case of constraint on capitalization. ForteBank’s current profitability is undermined by its relatively high level of operating expenses stemming from the rebranding process and head-office relocation. The bank enjoys an adequate net interest margin of 5.58% as of third-quarter 2012, focused on high-yielding lending to small and midsize enterprises (SMEs), although there has been a declining trend within past year due to intensified competition. We expect the overall margins to stabilize as soon as the bank continues to expand high-yielding lending to SMEs.

Our risk position assessment for ForteBank is a negative rating factor, mainly due to planned aggressive loan growth, existing single-name concentrations, and the short track record of the newly originated loan book. The bank bears single-name concentrations due to its still limited customer franchise. The top 20 borrowers comprise 63% of total exposure, including off balance sheet, or 168% of adjusted total equity (ATE), which is higher than the sector average. At the same time, the loan book is relatively diversified by industry. Related-party lending is not significant, with the only large exposure a letter of credit issued in the amount of 20% of ATE.

The bank’s credit loss experience of 2009 and 2010 refers to the old book of unsecured consumer loans originated by the former owners and management, comprising about 8% of the current total loan book. It has been provisioned by 89%, and we think that almost all the old problem loans have surfaced. The level of nonperforming loans (NPLs) (overdue more than 90 days) has been relatively stable throughout 2012, amounting to KZT1.4 billion or 9.8% as of Nov. 1, 2012, according to the Kazakh regulator’s data. This is better than the domestic systemwide average of 30.5%. We expect that, in absolute amounts, NPLs for a new SME loan book will increase as soon as the loan portfolio matures. We forecast credit costs for newly generated loans of about 2% annually in line with growth plans, which is not higher than the system average.

ForteBank’s funding and liquidity are neutral rating factors. The bank’s customer deposits represent 81% of the total funding base, but it lacks diversification. A large part of funding comes in the form of current accounts of related parties, which amount to about 50% of the total customer deposit base, which we consider to be a less-sensitive funding source. Current liquidity is kept high with cash and money-market instruments comprising 44% of assets. However we expect it to be diluted as soon as the bank expands lending and transfers part of the liquidity cushion into loans.

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

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

Ratings List

New Rating

ForteBank JSC

Kazakhstan National Scale Rating kzBB