Eximbank Kazakhstan Placed On CreditWatch Negative On Material Deterioration Of Liquidity And Funding

Eximbank Kazakhstan Placed On CreditWatch Negative On Material Deterioration Of Liquidity And Funding

FRANKFURT (S&P Global Ratings) Feb. 20, 2017–S&P Global Ratings said today that it had placed its ‘B-‘ long-term counterparty credit rating on Eximbank Kazakhstan JSC (KazEximbank) on CreditWatch with negative implications. We affirmed our ‘C’ short-term rating on the bank.

Additionally, we lowered our Kazakhstan national scale rating on KazEximbank
to ‘kzB+’ from ‘kzBB-‘ and also placed it on CreditWatch with negative

The CreditWatch placement reflects our view that a marked change in the bank’s
funding structure in 2016 and associated sharp reduction in its liquid assets
have left it less able to meet unplanned fund outflows than its domestic
peers. The bank continues to comply with its minimum regulatory liquidity
ratios, and we see no significant near-term default risk, helped by the
absence of large bond maturities in 2017 and very limited use of
confidence-sensitive retail deposits. We also note the current funding support
provided by the National Bank of Kazakhstan (NBK) and the recent equity
injection by the bank’s shareholder. However, we consider that, if sustained,
the current position could mean that KazEximbank would likely eventually fail
to retain the support of its creditors. At this stage, it is unclear to us if
its funding and liquidity position will improve in the near future. If it does
not, we will very likely downgrade the bank.

The bank’s liquidity has materially fallen over 2016, reflecting a significant
reduction in the share of liquid assets as of year-end 2016. Broad liquid
assets, according to S&P Global Ratings’ definition, reduced to Kazakhstani
tenge (KZT) 2.1 billion (about US$6.6 million) or 2.7% of total assets from
KZT6.8 billion or 9.6% a year earlier. They covered short-term wholesale
funding only by 20% at year-end 2016 compared to 95% a year earlier. Although
the bank is currently in compliance with all regulatory liquidity ratios, its
regulatory coefficient of current liquidity (a liquidity measure with a
three-month horizon) was only 0.4x as of Feb. 9, 2017, versus the minimum of
0.3x. Kazakh small peers are currently reporting a typical ratio of at least
0.7x and larger Kazakh banks of at least 1.0x.

We note that small banks, such as KazEximbank, and certainly those with high
funding concentrations, tend to maintain solid liquidity cushions in order to
bolster the confidence of their creditors and other customers. We now view
KazEximbank’s liquidity profile as demonstrably weaker than those we observe
at peers and leaving the bank with little flexibility to react to even a
moderate level of unplanned outflows. Thus, we have revised our assessment of
liquidity to moderate from adequate.

In our view, the bank’s funding profile has also significantly weakened over
2016, reflecting higher funding concentrations and large wholesale debt
repayments in 2017. This is demonstrated by a marked deterioration in the
bank’s funding metrics. Its stable funding ratio reduced to 87% as of year-end
2016 from 98% a year earlier, while its loan-to-deposit ratio weakened to 190%
from 126% on the same dates. The latter was about twice as weak as the banking
system average of just below 100% as of year-end 2016.

The following developments contributed to the weakening of the bank’s funding
profile and, at this stage, we do not expect them to reverse in 2017. Thus, we
have revised our view of the bank’s funding profile to below average, in
comparison with Kazakh peers who we assess as having average funding profiles.

  • First, in 2016, the bank’s shareholders withdrew their sizable deposit to fund their other business interests, which undermined our previous assumption of the stability of the bank’s related-party deposits. Deposits from related parties accounted for 31% of total deposits as of year-end 2016, down from 54% a year earlier. As a result, the bank’s total deposits reduced by about 18% over 2016.
  • Second, KazEximbank has significantly increased its reliance on short-term bank funding to compensate for reduction in customer deposits and to fund high loan growth of 18% in 2016. KazEximbank has received two loans from the NBK, accounting for about 30% of total funding as of year-end 2016. This comes at a time when the NBK has chosen to not provide liquidity support to some small banks in Kazakhstan. Instead it expected the banks’ shareholders to first provide some capital and liquidity support. By contrast, we note the recent KZT500 million capital injection by KazEximbank’s shareholder and at this time we expect that the NBK may well remain supportive of KazEximbank’s funding. However, this assumption is key because the KZT10 billion loan from the NBK due in November 2017 accounts for about 15% of KazEximbank’s liabilities.
  • Third, due to high concentrations of the depositor base, the bank is highly vulnerable to withdrawal of funds by large depositors. The top 20 depositors accounted for about 64% of deposits as of year-end 2016. Within them are a number of government-related entities (GREs). We have seen some GREs withdraw deposits from some small Kazakh banks over the past three months, but so far KazEximbank has not been affected by this development. Eximbank has KZT6.7 billion of GRE deposits due to mature in 2017, and therefore needs to retain the confidence of these GREs, as well as of its other depositors.
As a result of the above-mentioned reassessment of the funding and liquidity 
profiles, our stand-alone credit profile for KazEximbank now stands at 'ccc+', 
compared with 'b-' previously. 

Our long-term issuer credit rating on the bank remains at 'B-', in line with 
our "Criteria For Assigning 'CCC+', 'CCC', 'CCC-' And 'CC' Ratings," as we see 
no clear scenarios of default within the next 12 months, not least given the 
funding support of the NBK, unless KazEximbank experiences unplanned customer 
funds outflows and is not able to roll over the majority of maturing debt in 
2017. Nevertheless, the CreditWatch placement reflects our view that, if 
sustained, Eximbank's current modest liquidity buffer and deteriorated funding 
profile could mean that the bank eventually fails to retain the support of its 
creditors. This suggests a possible challenge to its sustainability in the 
medium term.

We will likely downgrade the bank within the next three months if it does not 
significantly bolster its liquidity buffer, and so strengthen its liquidity 
and funding metrics, bringing them to the levels that are comparable to those 
of its domestic peers with adequate liquidity and average funding profiles. 
While our assessment is both qualitative and quantitative, we note that Kazakh 
banks tend to maintain a stable funding ratio of above 100% and a ratio of 
broad liquid assets to short-term wholesale funding above 1.0x. While less 
likely, a downgrade could be hastened by any material unplanned customer funds 
outflows, or if we think that KazEximbank might fail to comply with the 
minimum regulatory liquidity ratios. 

We would expect to take the ratings off CreditWatch and affirm them if 
KazEximbank increases its liquidity cushion significantly, bringing it close 
to system-average levels. At the same time, we would need to see some progress 
in bolstering its non-NBK funding sources, so demonstrating that it retains 
the support of creditors. 

  • General Criteria: S&P Global Ratings’ National And Regional Scale Mapping Tables, June 01, 2016
  • Criteria – Financial Institutions – Banks: Bank Hybrid Capital And Nondeferrable Subordinated Debt Methodology And Assumptions, Jan. 29, 2015
  • General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014
  • Criteria – Financial Institutions – Banks: Quantitative Metrics For Rating Banks Globally: Methodology And Assumptions, July 17, 2013
  • General Criteria: Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, And ‘CC’ Ratings, Oct. 01, 2012
  • Criteria – Financial Institutions – Banks: Revised Market Risk Charges For Banks In Our Risk-Adjusted Capital Framework, June 22, 2012
  • Criteria – Financial Institutions – Banks: Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 09, 2011
  • Criteria – Financial Institutions – Banks: Banks: Rating Methodology And Assumptions, Nov. 09, 2011
  • Criteria – Financial Institutions – Banks: Bank Capital Methodology And Assumptions, Dec. 06, 2010
  • General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
  • Criteria – Financial Institutions – Banks: Commercial Paper I: Banks, March 23, 2004

Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All 
ratings affected by this rating action can be found on the S&P Global Ratings' 
public website at www.standardandpoors.com. Use the Ratings search box located 
in the left column.  Alternatively, call one of the following S&P Global 
Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office 
(44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; 
Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
Primary Credit Analyst: Annette Ess, CFA, Frankfurt (49) 69-33-999-157;
Secondary Contact: Anastasia Turdyeva, Moscow (7) 495-783-40-91;
Additional Contact: Financial Institutions Ratings Europe;

Company Overview

Joint Stock Company ‘Eximbank Kazakhstan’ provides banking services primarily to corporate customers and individuals in the Republic of Kazakhstan. It accepts deposits; originates loans and guarantees; and offers securities trading, foreign currencies, and derivative instruments. As of December 31, 2014, the company had four branches. Joint Stock Company ‘Eximbank Kazakhstan’ was founded in 1994 and is based in Almaty, the Republic of Kazakhstan.