Fitch affirms long-term ratings of two Kazakh banks

Mar 3. Trend

Fitch affirms long-term ratings of two Kazakh banksFitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of Kazakhstan-based Bank Centercredit (BCC) at ‘B’ and ATF Bank JSC at ‘B-‘, said the message of the agency Mar.2.

The Outlooks are Stable.

“The banks’ IDRs are driven by their standalone credit profiles, as captured by their Viability Ratings (VRs), and reflect weak asset quality, moderate capitalisation, modest profitability and near-term business risks stemming from the slowdown in Kazakhstan’s economy and lower oil prices,” said the message. “ATF’s lower ratings relative to BCC, reflects its weaker financial metrics in general, and in particular its significantly higher loan impairment.”

At the same time, both banks’ ratings are supported by their track records of continued debt repayments, solid liquidity cushions and limited amounts of remaining senior wholesale funding.

Non-performing loans (NPLs; overdue by more than 90 days) rose at both banks as a result of the 20 percent devaluation of the tenge at the beginning of 2014. However, total potentially problematic loans (including NPLs and restructured loans) remained largely stable in 2014 due to loan write-offs and some recoveries.

“BCC’s NPLs comprised 15 percent of gross loans at end-2014,” said the message. “The bank’s restructured loans and two large impaired agricultural sector exposures made up a further 10 percent. ATF’s NPL ratio stood at a high 34 percent, with restructured loans comprising a further 18 percent. Fitch expects both banks to intensify write-offs and work-out efforts in 2015 given tougher regulatory requirements on NPL ratios.”

In Fitch’s view, both banks’ asset quality might come under further pressure in case of a further marked devaluation of the tenge. ATF’s performing foreign-currency loans were equal to about 1.7x its Fitch Core Capital (FCC) and BCC’s were equal to 1.4x FCC at the end of the third quarter of 2014. However, Fitch’s base case expectation is that any deterioration would be gradual and within the tolerance level of the banks’ already low ratings.

“BCC’s FCC/risk-weighted assets ratio was 8 percent at the end of the third quarter of 2014, compared with 10 percent at ATF,” said the message. “However, the former’s problem loan reserve coverage was considerably more solid. Fitch estimates that BCC’s total IFRS reserves were equal to 98 percent of the bank’s NPLs, or about 60 percent of total potentially problematic loans. ATF’s reserves covered a more moderate 70 percent of NPLs, or 45 percent of total potentially problematic loans.”

The regulatory core Tier I and total capital ratios stood at 10 percent and 14 percent, respectively, at BCC and 11 percent and 12 percent at ATF at the end of 2014. Given the limited proportions of foreign-currency risk weighted assets (30 percent at ATF and 17 percent at BCC at the end of 2014) and the negligible net open foreign-currency positions, Fitch expects the direct impact on these ratios to be moderate and manageable in case of a devaluation of the tenge.

“ATF’s loss-absorption capacity is further constrained by its weak core profitability, with pre-impairment profit adjusted for interest income accrued but not received in cash being close to zero in 9 months of 2014,” said the report of the agency. “BCC’s annualised adjusted pre-impairment profit was moderately stronger, equal to 6 percent of average equity in 9 months of 2014, but this still provides limited loss absorption given still significant problem loan generation.”

Near-term liquidity cushions are comfortable and both banks have proven access to stable domestic funding sources, said the analysts of Fitch. However, structural maturity mismatches, the current shortage of tenge liquidity on the market and material deposit concentrations are weaknesses for the banks’ liquidity profiles.

At the end of 2014, ATF’s highly liquid assets were equal to 20 percent of liabilities. The bank repaid its outstanding senior eurobond in 2014 but remains highly reliant on funding from state companies. BCC’s liquidity was equal to a more modest 16 percent of liabilities, or 11 percent net of upcoming funding repayments (including a loan from the National Bank of Kazakhstan, received in 2014 to support the bank’s liquidity following a deposit run, which could be rolled over).

At the same time, the agency said that the ratings would be downgraded in case of material further asset quality deterioration, capital erosion and/or a liquidity squeeze. Upgrades would require balance sheet clean-ups and/or significant improvements in capitalisation and core performance. Any changes in bank issuer ratings would likely be matched by changes in their debt ratings.

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