S&P assigns credit ratings to Subsidiary organization Bank VTB (Kazakhstan); outlook Stable

September 27. KASE

S&P assigns credit ratings to Subsidiary organization Bank VTB (Kazakhstan); outlook StableStandard & Poor’s Ratings Services assigned its ‘BBB-‘ long-term and ‘A-3’ short-term counterparty credit ratings to Kazakhstan-based VTB Bank (Kazakhstan) (VTB Kaz). The outlook is stable.

At the same time, we assigned our ‘kzAA’ Kazakhstan national scale rating to the bank.

We consider VTB Kaz to be a “highly strategic” subsidiary of Russia-based VTB Bank (JSC) because the Kazakhstan market is an important part of the group’s expansion strategy, VTB Kaz’s operations are highly integrated with those of the group, and the parent has committed support under any foreseeable circumstances.

Despite its small size-less than 1% of VTB’s total assets-we believe integration is strong because:

– VTB Kaz is a greenfield investment and not an acquisition; its IT infrastructure, risk management, and underwriting process have been built in line with VTB’s own practices. This makes it difficult to detach the bank from the rest of the group;

– VTB Kaz is 100%-owned by VTB and shares its name and branding;

– VTB Bank provides close to 9% of the subsidiary’s funding;

– The start-up nature of VTB Kaz makes the bank dependent on VTB for business growth, notably for capital and access to creditworthy clients; and

– The strong ties between Russia and Kazakhstan, economically and politically, make it very unlikely that state-owned VTB Bank would dispose of its subsidiary, despite forecast weak operating performance.

In accordance with our criteria, we rate VTB Kaz one notch below the level of the group credit profile for VTB, which is ‘BBB’. We view the stand-alone credit profile (SACP) of VTB Kaz at ‘b’, reflecting:

– The ‘bb-‘ anchor for a bank operating primarily in Kazakhstan.

– Its “moderate” business position. The bank has a short track record of existence, limited market share, and the success of its expansion strategy is still to be proven. These factors are partly balanced by its parent’s support both through funding and operational maintenance. We also view the group’s brand name as a positive business factor. With an asset base of Kazakhstani tenge (KZT) 131 billion as of Aug. 1, 2013, VTB Kaz holds the 20th position in the Kazakhstan banking sector, but we expect it to gain market shares rapidly.

– Its “moderate” capital and earnings. We expect its risk-adjusted capital ratio before adjustments to decline to 5.0%-5.5% over the next 12-18 months, reflecting slowing loan growth and only marginal profits. The forecast is based on our expectation of 25% asset growth in 2013 and 20% in 2014. We think that such growth will translate into profits for the bank, though, which is the main goal of management and shareholders.

– Its “moderate” risk position, which balances significant concentrations and our expectation of lowering growth rates with relatively good portfolio performance and risk management policies that are fully integrated with the parent’s. Corporate loans comprised 77% of the bank’s credit portfolio as of end-March 2013. We note good industry diversification of the corporate loan book, with 36.4% exposure to the trade industry. Individual loan concentrations as a percentage of total adjusted capital are high, but comparable with those of Kazakh peers, and we expect them to fall in line with VTB Kaz’s growth plans. The bank’s current asset quality metrics are better than the domestic system average.

– Its “average” funding and “adequate” liquidity, reflecting a diversified funding base and a strong liquidity buffer. The funding profile is well diversified, with a dominant portion coming from customer deposits. We also believe ongoing funding support from the parent reduces refinancing risks. Funding from the parent accounted for 9.05% of the total as of Dec. 31, 2012. But management aims to operate on a self-funding basis, so we expect the bank’s assets-to-liabilities profile to strengthen in the next 12-24 months.

The stable outlook mirrors our outlook on the parent. We assume that VTB Kaz will remain a “highly strategic” subsidiary of VTB Bank) and continue to receive operational, managerial, and financial support from its parent under almost all foreseeable circumstances.

Positive or negative rating actions on parent VTB Bank will likely result in parallel actions on VTB Kaz because, in accordance with our criteria, we rate “highly strategic” subsidiaries one notch below the group credit profile of the parent. Even though a slight improvement or deterioration of the SACP would not, in isolation, result in a rating change, we expect VTB Kaz’s financial profile to gradually improve as the bank attains a larger scale. Any long period of underperformance or inability to reach the profitability or self-financing goals  imposed by the parent could lead us to reconsider the “highly strategic” status, and therefore lower the ratings.

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