Fitch Places Kazakh Halyk Bank On Rating Watch Negative

Fitch: Kazakhstan Starts to Get to Grips With Troubled Banks

Fitch Ratings has placed Halyk Bank of Kazakhstan’s (HB) ‘BB’ Long-Term Issuer Default Ratings (IDRs) and its ‘bb’ Viability Rating (VR) on Rating Watch Negative (RWN). Fitch has also placed the ‘CCC’ Long-Term IDRs of Kazkommertsbank (KKB) on Rating Watch Evolving (RWE) and downgraded the bank’s VR to ‘f’ from ‘ccc’.

The rating actions follow recent announcements by the banks and the Kazakh authorities on HB’s potential acquisition of a controlling stake in KKB. A full list of rating actions is provided at the end of this commentary. For more details on the banks’ pre-acquisition financial profiles, please see ‘Fitch Downgrades Tsesnabank to ‘B’, Affirms 5 Other Kazakh Banks’ dated 20 December 2016 at www.fitchratings.com.

KEY RATING DRIVERS – HB’S IDRS, VRS

The RWN on HB’s ratings reflects the possible negative impact on HB’s capitalisation and asset quality as a result of the potential acquisition of KKB.

Fitch expects that HB will only acquire KKB if the latter first receives direct or indirect considerable financial support. The National Bank of Kazakhstan (NBK) has announced that such support is likely to take the form of a purchase of KKB’s problem assets by the problem loan fund (PLF). KKB has said that such support should result in “the coverage of possible risks connected with the loan owed to KKB by JSC BTA Bank”, the main risk on KKB’s balance sheet, which was equal to 6x its Fitch Core Capital (FCC) at end-1H16.

Notwithstanding this expected support, Fitch believes there is a material risk that KKB’s problem assets may not be fully removed from the bank’s balance sheet or adequately reserved prior to a transaction. Senior country officials recently committed to providing KZT2 trillion to the PLF for subsequent problem asset purchases, of which KZT1.1 trillion has been provided. This compares with a net exposure to BTA of KZT2.4 trillion.

HB’s capitalisation could weaken significantly as a result of the acquisition of KKB. If HB’s consolidated FCC remains unchanged following the transaction (i.e. it pays for KKB an amount equal to KKB’s post-clean-up net asset value) and its consolidated risk-weighted assets (RWAs) increase by those of KKB (net of the RWAs associated with the BTA exposure), then HB’s FCC ratio would fall from 19.5% (at end-3Q16) to 11.3%.

Potential additional provisioning needs on KKB’s assets could represent a further drag on HB’s solvency, although this would still be supported by HB’s strong internal capital generation, in Fitch’s view. HB’s pre-impairment profit (annualised) was equal to a high 7% of average loans in 9M16. KKB’s pre-impairment profit (adjusted for interest income accrued but not received in cash and other non-recurring items) was negative in 9M16, but should become positive if it replaces the BTA exposure with income-earning assets.

Fitch does not expect any significant negative impact on HB’s strong funding and liquidity profile as a result of the transaction. Any cash payment for KKB is likely to be small relative to HB’s liquidity buffer and Fitch does not expect material volumes of KKB’s debt to be accelerated as a result of any acquisition. The consolidated loans/deposits ratio (assuming the removal of the BTA exposure) would be about 64%, compared with 79% at HB at end-3Q16.

KEY RATING DRIVERS – KKB’S IDRS, VRS

The RWE on KKB’s ‘CCC’ Long-Term IDRs reflects the potential for the ratings to be upgraded as a result of an acquisition by a higher-rated institution and the expected clean-up of the loan book and the potential for the ratings to be downgraded to ‘RD’ (Restricted Default) if any losses are imposed on senior creditors as part of the restoration of the bank’s solvency (the authorities have given no indication that losses will be imposed). The ratings could also be downgraded in case of a hypothetical breakup of the deal and, hence, the collapse of the main financial rehabilitation scenario for KKB proposed by the authorities.

The downgrade of KKB’s VR to ‘f’ from ‘ccc’ reflects Fitch’s view that the bank has failed and requires external support to address a material capital shortfall. In Fitch’s view, the planned large asset sale to the PLF represents a de-facto recognition by the Kazakh authorities of the scale of KKB’s asset-quality and solvency problems. Fitch has not downgraded KKB’s IDRs following the downgrade of the VR as the bank continue to services its obligations and may receive external support without losses being imposed on senior creditors.

KEY RATING DRIVERS – SUPPORT RATINGS (SR) AND SUPPORT RATING FLOORS (SRF)

The affirmation of HB’s SR at ‘4’ and SRF at ‘B’ reflects the bank’s exceptional systemic importance, but also the authorities’ record of imposing losses on senior creditors in bank resolutions.

The RWP on KKB’s SR of ‘5’ reflects the potential for this to be upgraded if KKB is acquired by a higher-rated bank. The RWP on the SRF of ‘No Floor’ considers positively the plans to provide material financial support to the bank.

KEY RATING DRIVERS – DEBT RATINGS

The Rating Watches on the banks’ debt ratings match those on their Long-Term IDRs. Fitch has placed KKB’s dated subordinated and perpetual debt ratings on RWE (rather than downgraded them in line with the VR) to reflect uncertainty as to whether they will absorb losses as part of the bank’s resolution.

KEY RATING DRIVERS – HB’S SUBSIDIARIES

The RWN on the support-driven Long-Term IDRs and SRs of HB’s subsidiaries – JSC Halyk Finance (HF) and JSC Halyk Bank Georgia (HBG) – match the RWN on the parent.
RATING SENSITIVITIES

Fitch expects to take rating actions on HB, KKB, HF and HBG when the acquisition is completed (or abandoned) and sufficient information is available on the financial profiles of the entities following the transaction. The resolution of the rating watches may take more than six months, although Fitch understands that if the parties go ahead with the planned transaction, then they aim to complete it reasonably promptly.

HB and its subsidiaries could be downgraded if in Fitch’s view the bank’s asset quality and/or capitalisation weaken materially as a result of the acquisition. However, the ratings could be affirmed if in Fitch’s view any weakening of asset quality or capitalisation is moderate, or if the transaction is abandoned.

KKB could be upgraded to a rating level close to that of HB if it is acquired by the latter and in Fitch’s view HB would have a strong propensity to support its subsidiary. KKB could be downgraded if senior creditors absorb losses as part of the bank’s resolution, or if the transaction is abandoned without an alternative creditor-friendly resolution scenario being proposed.

The rating actions are as follows:
Halyk Bank of Kazakhstan
Long-Term Foreign and Local Currency IDRs: ‘BB’; placed on RWN
Short-Term Foreign and Local Currency IDRs: affirmed at ‘B’
Viability Rating: ‘bb’; placed on RWN
Support Rating: affirmed at ‘4’
Support Rating Floor: affirmed at ‘B’
Senior unsecured debt: ‘BB’; placed on RWN

Kazkommertsbank
Long-Term Foreign and Local Currency IDRs: ‘CCC’; placed on RWE
Short-Term Foreign and Local Currency IDRs: ‘C’; placed on RWE
Viability Rating: downgraded to ‘f’ from ‘ccc’
Support Rating: ‘5’; placed on RWP
Support Rating Floor: ‘No Floor’; placed on RWP
Senior unsecured debt long-term rating: ‘CCC’; placed on RWE; Recovery Rating at ‘RR4’
Senior unsecured debt short-term rating: ‘C’; placed on RWE
Dated subordinated debt: ‘CC’; placed on RWE; Recovery Rating at ‘RR5’
Perpetual debt: ‘C’; placed on RWE; Recovery Rating at ‘RR6’

JSC Halyk Bank Georgia
Long-Term IDR: ‘BB-‘; placed on RWN
Short-Term IDR: affirmed at ‘B’
Support Rating: ‘3’; placed on RWN

JSC Halyk Finance
Long-Term Foreign and Local Currency IDRs: ‘BB’; placed on RWN
Short-Term Foreign and Local Currency IDRs: affirmed at ‘B’
Support Rating: ‘3’; placed on RWN

Additional information is available on www.fitchratings.com

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