Fitch Upgrades Alfa Bank Kazakhstan to ‘BB-‘; Outlook Stable
Fitch Ratings-Moscow/London-03 April 2017: Fitch Ratings has upgraded Alfa Bank Kazakhstan’s (ABK) Long-Term Issuer Default Ratings (IDRs) to ‘BB-‘ from ‘B+’. The Outlook is Stable. A full list of rating actions is at the end of this commentary.
KEY RATING DRIVERS – IDRS, VRS, NATIONAL RATINGS
The upgrade of ABK’s IDRs reflects the extended record of good financial performance supported by relatively low funding costs and reasonable asset quality, considerable capital buffer and ample liquidity. At the same time, ABK’s ratings factor in its currently small franchise.
ABK’s loan book is relatively small (35% of total assets at end-2016), reflecting deleveraging (by 25% in 2016) in favour of investments into National Bank of the Republic of Kazakhstan low risk notes (36% of total assets). Loan quality is adequate, with non-performing loans (NPLs, 90 days overdue) comprising a moderate 7% of the end-2016 book. NPLs were comfortably (94%) covered by reserves. About 13% of loans were restructured but reportedly performing. Based on a review of the largest restructured loans, Fitch believes that these exposures are well covered by hard collateral, posing only moderate credit risk. As a further indication of adequate asset quality, the share of accrued but not received interest income was less than 2% in 2016.
Loan concentrations are high, with the 25 largest exposures making 69% of corporate loans at end-2016. However, more than half of these are composed of low to moderate risk working-capital loans to cash-generative clients. Also positively, ABK’s foreign currency lending was moderate, at 18% of gross loans at end-2016, which limits asset-quality risks.
Capitalisation is strong, reflected by a high Fitch Core Capital (FCC) ratio of 18% at end-2016, up from 14% at end-2015. The increase was due to deleveraging and reasonable internal capital generation (ROAE of 12% in 2016). Fitch estimates that the end-2016 capital cushion would be sufficient to increase loan impairment reserves up to 36% from the current 7% of the loan book without breaching minimum capital requirements. Beyond that, considerable additional loss absorption capacity is available from the bank’s pre-impairment operating profit (equal to 10% of average loans in 2016).
The FCC ratio could potentially reduce to a still reasonable 13%-15% over the next three years as ABK plans to rebuild its loan book subject to it being able to attract good quality borrowers.
Liquidity is ample, with liquid assets, including cash, short-term bank placements and liquid securities covering a high 66% of customer deposits at end-2M17. However, the depositor concentration level is high (the top 20 made up 32% of customer funding at end-2016), making the bank somewhat vulnerable to sudden outflows of the largest accounts.
The Support Rating of ‘4’ reflects Fitch’s view of the limited probability of support that might be forthcoming from Alfa Bank Russia (ABR, BB+/Stable) or other group entities, if needed. In Fitch’s view, support may be forthcoming in light of the common branding, potential reputational risk of any default at ABK and the small cost of any support that may be required.
At the same time, Fitch views ABR’s propensity to provide support as limited because (i) it holds shares in ABK on behalf of ABH Holdings S.A. (ABHH), to which it has ceded control and voting rights through a call option, under which ABHH may acquire 100% of ABK from ABH Financial Limited (the entity controlling 100% of ABR) until end-December 2019; and (ii) there is limited operational integration between ABK and ABR.
Support from other Alfa Group entities, in Fitch’s view, also cannot be relied on in all circumstances, especially in a systemic financial crisis in Kazakhstan. Fitch notes ABHH’s failure to provide full support to its Ukraine-based subsidiary PJSC Alfa-Bank (ABU; B-/Stable) in 2008.
SENIOR UNSECURED DEBT RATING
ABK’s senior unsecured local debt ratings are aligned with the Long-Term Local-Currency IDR and National Long-Term rating, and reflect Fitch’s assessment that recoveries are likely to be average in the event of any default.
IDRS, NATIONAL RATINGS AND SENIOR DEBT
Further upside potential for ABK is limited given the difficult operating environment and the bank’s narrow franchise. A downgrade could result from a substantial deterioration of asset quality or capitalisation if this was not offset by sufficient and timely equity support from the bank’s shareholders.
The debt ratings would likely change in line with the bank’s IDRs.
The rating actions are as follows:
Long-Term Foreign-Currency IDR upgraded to ‘BB-‘ from ‘B+’; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at ‘B’
Long-Term Local-Currency IDR upgraded to ‘BB-‘ from ‘B+’; Outlook Stable
National Long-Term Rating upgraded to ‘BBB+(kaz)’ from ‘BBB(kaz)’; Outlook Stable
Viability Rating upgraded to ‘bb-‘ from ‘b+
Support Rating affirmed at ‘4’
Senior unsecured debt: upgraded to ‘BB-‘ from ‘B+’
National senior unsecured debt rating: upgraded to ‘BBB+(kaz)’ from ‘BBB(kaz)’
Summary of Financial Statement Adjustments – ABK’s core Tier 1 and Tier 1 regulatory capital ratios were both adjusted upward by 2.6% and total regulatory capital ratio was adjusted upward by 3.0%, since these ratios were incorrectly stated in the IFRS accounts.
+7 495 956 0979
Fitch Ratings CIS Ltd
26 Valovaya Street
+7 495 956 9981
+7 495 956 6906
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: email@example.com; Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: firstname.lastname@example.org.
Additional information is available on www.fitchratings.com
Global Bank Rating Criteria (pub. 25 Nov 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001