S&P downgrades Alliance Bank (Kazakhstan) ratings, Outlook “Stable”

September 23. KASE

S&P downgrades Alliance Bank (Kazakhstan) ratings, Outlook "Stable"Standard & Poor’s Ratings Services today said it lowered its long-term counterparty credit rating on Kazakhstan-based Alliance Bank JSC to ‘CCC+’ from ‘B-‘. We also lowered the Kazakhstan national scale rating to ‘kzB’ from ‘kzBB-‘ and affirmed our ‘C’ short-term counterparty credit rating on the bank. The outlook is stable.

The rating action reflects our view that the importance of Alliance Bank to the Kazakh government has decreased since the bank’s default in 2009.

Alliance Bank ranked among the top five banks in Kazakhstan prior to the default, with a leading market share of about 20% in retail loans, including more  than 50% in express consumer loans in 2008. Following the subsequent restructuring in 2010, the bank ranked only No. 9 at mid-year 2013. Other midsize banks without a large legacy of problem loans have grown faster than Alliance Bank and have advanced their market positions. They have also challenged Alliance Bank’s leading market position in unsecured consumer loans, the most rapidly growing customer segment in Kazakhstan.

In our view, a second possible default of Alliance Bank would have a limited impact for the Kazakh government because the bank does not offer any unique products or services. It has a small 4% market share, and other Kazakh commercial banks could provide similar services. We consider that Alliance Bank has low systemic importance in the Kazakh banking sector, in view of its limited market share in total loans and retail deposits.

We continue to consider Alliance Bank as a government-related entity (GRE), but we note that the Kazakh government has announced its intention to sell its majority stake in 2013. However, we think a sale in the next 12 months is uncertain, in the absence of actions to bolster the bank’s solvency to make it more attractive to a potential acquirer.

As a result, we have revised our view of Alliance Bank’s role for the Kazakh government as a GRE to “limited importance” from “important,” and now consider that the likelihood of extraordinary government support to the bank is “moderate” versus “moderately high” previously. Consequently, we now include only one notch of uplift in the long-term rating on the bank, reflecting potential  future government support.

The stable outlook on Alliance Bank reflects our expectation that the bank’s SACP will remain unchanged over the next 12 months and the government will remain a supportive owner during this period. We expect the bank to meet regulatory requirements on liquidity and capitalization, but foresee no material improvement in its asset quality or capitalization in the next 12 months, given the time-consuming recovery process and the bank’s low core profitability.

In our view, the most likely driver of a rating change on the bank would be an announced sale. We would review the implications for the ratings on Alliance Bank if a sale is announced. We would likely remove the one notch of uplift we currently incorporate into the ratings for the “moderate” likelihood of support from the Kazakh government. However, whether the ratings were affected or not would depend on the nature and terms of the sale, which are factors that could influence the SACP, and the identity of the acquirer.

Separately, we could take a negative rating action on the bank if we saw significant liquidity deterioration, mainly due to deposit withdrawals. However, this is not our base-case scenario.