Fitch Affirms Kazakhstan Mortgage Company at ‘BBB-‘; Outlook Stable

Fitch assigns 'BB' IDR to Kcell JSC; Outlook Stable

Fitch Ratings-Moscow/London-22 November 2016: Fitch Ratings has affirmed Kazakhstan Mortgage Company’s (KMC) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘BBB-‘ with Stable Outlook. The Short-Term Foreign Currency IDR has been affirmed at ‘F3’.

Fitch has also affirmed the Long-term rating of KMC’s outstanding senior debt at ‘BBB-‘ and the Long-term rating of the outstanding subordinated bonds at ‘BB+’.

The affirmation reflects Fitch’s unchanged view of KMC as a credit-linked entity under its public-sector entities rating criteria and unchanged assessment of the entity’s linkage with the Republic of Kazakhstan (BBB/Stable/F2).


KMC’s ratings reflect the company’s ultimate ownership by the government, its high strategic importance in social housing and strong control and oversight by the state. The one-notch rating differential factors in a “mid-range” assessment of its legal status and integration with the state.

Legal Status Assessed as Midrange

Fitch considers KMC’s legal link with the state as moderate. This results from KMC’s legal status as a joint-stock company, which is indirectly owned by the state. Fitch views Kazakhstan as the ultimate owner of KMC as the company’s shares are held by the National Managing Holding Company Baiterek (BBB/Stable/F2), which is 100%-owned by the state. KMC acts as the government’s agent authorised to implement government policy in the housing sector, although the company operates under the general legal regime and subject to bankruptcy.

Strategic Importance Assessed as Stronger

Fitch views KMC as strategically important to the state due to its key role in developing housing affordability in the republic, as announced in the Kazakhstan’s Programme for Regions’ Development to 2020. Under this programme, KMC is required to deliver about 1.4 million sq. m. of social rental housing across the republic until 2020. The total cost of the programme is estimated at KZT239.1bn, of which state funding comprises KZT163.3bn, or 68%. The remaining financing will come from bond issues and KMC’s rental proceeds.

Control Assessed as Stronger

KMC continues to operate under strong control and oversight from the central government. KMC’s Board of Directors is controlled by the head of Baiterek, whose Board of Directors is chaired by the Prime Minister of Kazakhstan. Baiterek approves KMC’s annual budgets, borrowing decisions, investments and dividend policy. The company is monitored by various state auditors and controllers for the use of funds allocated from the state budget and the National Fund of Kazakhstan.

Integration Assessed as Midrange

Fitch views KMC’s integration into the general government sector as moderate. The company has a separate budget and its debt is not consolidated in state debt. However, KMC heavily relies on funding received from the government and state-owned institutions in the form of equity injections, subsidised loans and financing through bond issues.

In 2016, KMC received two loans from Baiterek for a total KZT41.6bn (2015: KZT92.5bn) to be invested in social rental housing. The funding was sourced from the National Fund of Kazakhstan (KZT22.5bn) and the state budget (KZT19.1bn). Both loans have a 30-year maturity and a 0.15% annual interest rate. The loans were the final direct state funding suggested by the programme. However, Fitch expects the government to continue support the entity throughout the programme with additional financing or by adjusting the programme’s target in case of need as has happened before.

KMC also benefits from indirect support from state-owned institutions. At 1 October 2016, 76% (end-2015: 72%) of KMC’s KZT59bn outstanding domestic bonds were held by state-owned institutions such as the Uniform Pension Fund, Development Bank of Kazakhstan (BBB-/Stable/F3) and House Construction Savings Bank of Kazakhstan (BBB-/Stable/F3). This underpins Fitch’s view that KMC would be eligible for government support in case of need.

Improved Operating Performance

KMC’s performance has been improving during the last three years supported by low-cost funding. In 2015, the company recorded KZT3.8bn net profit (2014: KZT1.2bn). Net interest income improved to 5.1% in 2015 from 2.9% in 2014. Management expects the company will remain profitable over the medium term.

Changing Assets Structure

KMC’s operations are now focused on the provision of social rental housing. In 2016, the entity did not invest in a mortgage portfolio and does not plan to do so in 2017-2018. This led KMC’s assets to be dominated by rental-related assets, which made up 38% of total assets at end-2015 (2014: 8%), while the concentration of mortgage loans reduced to 34% from 52% in 2014.


An upgrade may result from an upgrade of the sovereign ratings, provided that KMC’s links to the government are unchanged, or from tighter integration with the sovereign, including an explicit government guarantee.

Changes to KMC’s legal status, leading to a dilution of control or weakening of support by the sovereign could lead Fitch to widen the notching, resulting in a downgrade. Negative rating action on the Republic of Kazakhstan would also be reflected by KMC’s ratings.

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