Moody’s downgrades ratings of Kaspi Bank, bank deposit ratings outlook changed to negative from stable

April 24. KASE. Moody’s Investors Service, London

Outlook on deposit ratings has been changed to negative from stable; outlook on debt ratings remains negative

Moody's downgrades ratings of Kaspi Bank, bank deposit ratings outlook changed to negative from stableMoody’s Investor s Service has today downgraded Kaspi Bank’s senior unsecured local- and foreign-currency debt ratings to B2 from B1 and downgraded the bank’s Baseline Credit Assessment (BCA) to b2 from b1. Concurrently, Moody downgraded the bank’s subordinated local-currency debt rating to B3 from B2 and the national scale rating (NSR) to Ba3.kz from Ba2.kz. Moody’s also affirmed Kaspi Bank’s B1/Not Prime deposit ratings. The outlook on Kaspi Bank’s long-term global scale senior unsecured ratings remains negative, while the outlook on the long-term global scale deposit ratings was changed to negative from stable. Moody’s has also withdrawn (for business reasons) the outlook on the bank’s subordinated debt. Please refer to Moody’s Investors Service’s Policy for Withdrawal of Credit Ratings, available on its website www.moodys.com.

RATINGS RATIONALE

– BCA AND DEBT RATINGS

As detailed below, the three key drivers for the downgrade of Kaspi Bank’s BCA and debt ratings are (1) the bank’s weakening asset quality; (2) the substantial decline in loan loss reserve coverage; and (3) the deteriorating operating environment in Kazakhstan.

– Firstly, in accordance with the bank’s most recent audited IFRS statement, the share of unsecured consumer loans (including credit cards and point-of-sale loans) increased to 71.9% of gross loans as at year-end 2014 (year-end 2013: 67.6%; year-end 2012: 56.5%). Moreover, ‘past due’ loans climbed to 24.5% of gross loans at year-end 2014 (year-end 2013:21.7%; year-end 2012: 18.2%). In Moody’s view, this performance indicates the increased fragility of the bank’s assets.

– Secondly, although Kaspi Bank’s capital adequacy and profitability remained healthy in recent years, the coverage of overdue loans by loan loss reserves declined significantly in 2012-14. As at year-end 2014, the bank’s coverage of ‘past due’ loans by loan loss reserves stood at 44.6% (year-end 2013: 62.1%; year-end 2012: 81.8%), while the coverage of loans overdue more than 90 days was at 94.7% (year-end 2013: 110.8%; year-end 2012: 113.1%).

– Thirdly, Moody’s observes the deteriorating operating environment in Kazakhstan where 100% of Kaspi Bank’s operations are concentrated. The rating agency expects Kaspi Bank’s financial metrics to further weaken in the next 12 to  18 months that is now also reflected in the negative outlook on the bank’s deposit  ratings. Moody’s forecasts a deceleration in real GDP growth to 1.5% in 2015,  from 4.3% in 2014 and 6.0% in 2013. This weaker trend will impair credit demand  from creditworthy customers, and, along with an increasingly competitive domestic environment, will lead to lower levels of origination and a weaker asset  quality performance. Moody’s also notes the recent substantial increase in  interest rates, caused by reduced availability of Kazakhstan-tenge-denominated  funding in the banking sector, that will negatively weigh on the bank’s funding  costs and profitability.

As a result of the above-mentioned developments, Moody’s downgraded the BCA of Kaspi Bank to b2 from b1, and downgraded the bank’s debt ratings by one notch. Moody’s notes that Kazakh banks’ debt ratings, including those of Kaspi Bank, do not incorporate any government support given Kazakh authorities’ recent track record for bailing in creditors in the event of large bank  failures.

– DEPOSIT RATINGS

The downgrade of Kaspi Bank’s BCA had no impact on its B1 deposit ratings because Moody’s revised its government support assumptions to ‘moderate’ (formerly ‘low’) for the bank’s deposits. This decision captures Kaspi Bank’s increased market share in deposits over recent years which is indicative of the bank’s increased systemic importance. According to the National Bank of Kazakhstan, Kaspi Bank held a 9.4% market share in retail deposits and a 6.2% share in total deposits as at year-end 2014 (year-end 2010: 6.8% and 3.7%, respectively). Given Kaspi Bank’s increased systemic importance, Moody’s incorporates one notch of systemic support into the bank’s deposit ratings, thus positioning these ratings one notch above the bank’s BCA of b2.

WHAT COULD CHANGE THE RATING DOWN/UP

Kaspi Bank’s long-term debt and deposit ratings could be downgraded as a result of any deterioration in its solvency metrics, i.e. asset quality, profitability and  capital adequacy.

Moody’s may upgrade Kaspi Bank’s long-term ratings in the event of any substantial improvement in the operating environment and on evidence of improvement in the bank’s asset quality profile, albeit a scenario that – in Moody’s view – has low likelihood in the next 12 to 18 months.

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