Fitch Rates JSC AsiaCredit Bank ‘B-‘; Stable Outlook
July 23. Reuters
Fitch Ratings has assigned Kazakhstan-based JSC AsiaCredit Bank (ACB) a Long-term Issuer Default Rating (IDR) of ‘B-‘ with a Stable Outlook. A full list of rating actions is at the end of this comment.
KEY RATING DRIVERS
ACB’s Long-term IDRs are underpinned by its Viability Rating (VR) of ‘b-‘, which reflects its currently small franchise and low competitiveness, limited track record of performance under the current controlling shareholder; highly concentrated and under-provisioned loan book; significant reliance on deposits of state-owned entities; and only moderate profitability. At the same time, the ratings positively consider the currently strong economic growth in Kazakhstan, the bank’s currently reasonable capitalisation and liquidity.
The Support Rating of ‘5’ reflects Fitch’s view that external support from ACB’s private shareholder, although possible, cannot be relied upon. The Support Rating Floor ‘No Floor’ is based on the bank’s limited role in the domestic banking sector.
ACB is a small universal bank which was established in 1992 and is now operating in Almaty and Astana, as well as in oil-rich Atyrau and Aktau. In 2008, a 40% stake was acquired from Saudi investors by Mr. Nurbol Sultan who is currently the bank’s major shareholder. Mr. Sultan consolidated 81.6% of the bank by end-H113 and plans to further increase his share. The bank has grown rapidly in the past few years (106% loan growth in 2012 and 227% for 2011), but as of end-2012 had only USD364m of assets, which corresponds to 0.4% of the Kazakh banking system.
ACB’s reported asset quality is on par with its peers with non-performing loans (NPLs, 90 days past overdue) a moderate 4.6% of gross loans at end-Q113, although they were only 37% covered by reserves. Furthermore, restructured exposures stand at higher 6.6%, which together with unreserved NPLs equalled a material 34% of end-Q113 Fitch core capital (FCC). The loan book quality is rather volatile and suffers from high single-name concentration (largest 25 borrowers comprise 65% of end-Q113 loans) and significant exposures to vulnerable sectors of the economy such as construction and agriculture (at least 68% and 71% of end-Q113 FCC, respectively, based on analysis of the largest exposures).
The bank’s profitability is moderate with return on average assets (ROAA) of 2.5% in 2012 and only 0.6% in 2011. While ACB currently enjoys a relatively wide net interest margin (7.7% in 2012 and 8.6% in 2011), it is under pressure as the bank tries to attract more wholesale funding and retail deposits, which come at a higher cost. Further pressure on the bottom line in the near term could stem from increased operating costs following the bank’s growth and network expansion. Fitch is also concerned about the quality of earnings, as a material 14% of 2012 accrued interest income (23% in 2011) was not received in cash.
The bank’s liquidity buffer is reasonable covering 38% of customer accounts at end-Q113. However, despite efforts to diversify funding, ACB still heavily relies on few large corporate deposits (the top 15 names contribute 62% of end-Q113 customer accounts or 55% of liabilities) almost half of which is sourced from state-owned entities. At the same time, the complete withdrawal of the latter deposits from the bank is unlikely, given the overall reliance of the Kazakh banking sector on state funds.
The capital position is currently adequate with the ratio of FCC to weighted risks of 29% at end-2012 but it is expected to weaken as the bank’s earnings generation significantly lags growth. Unless there are significant capital injections the capitalisation will therefore quickly deteriorate. At the same time, current capital levels suggest that the bank could reserve an additional 13% of gross loans at end-Q113 (19% at end-2012) before breaching prudential requirements. Positively, this would be enough to fully reserve NPLs and restructured loans and still comply with local regulations.
ACB’s IDRs and VR could be upgraded if there was an extended track record of reasonable performance; material improvement in the quality of borrowers; and timely equity injections as required by growth plans to support adequate capitalisation. Downward pressure on the ratings could result from a significant deterioration of the economy, or the bank’s asset quality or capitalisation.
The rating actions are as follows:
Long-term foreign currency IDR: assigned at ‘B-‘; Outlook Stable
Short-term foreign currency IDR: assigned at ‘B’
Long-term local currency IDR: assigned at ‘B-‘; Outlook Stable
Viability Rating: assigned at ‘b-‘
Support Rating: assigned at ‘5’
Support Rating Floor: assigned at ‘No Floor’