Liquidity Deterioration Made Bank Rbk More Vulnerable To Cash Outflow Risk – S&P

Kazakhstan-Based JSC Eurasian Bank outlook revised to negative on capitalization stress; 'B/B' ratings affirmed

According to S&P Bank RBK’s persistently low liquidity cushion leaves it less able to meet unplanned cash outflows, the agency said in its report.

S&P Global Ratings placed its ‘B-‘ long-term counterparty credit rating and ‘kzB+’ Kazakhstan national scale rating on Bank RBK JSC on CreditWatch with negative implications. Additionally, the agency raised its short-term counterparty credit rating on Bank RBK to ‘B’ from ‘C’, removed the UCO (under criteria observation) designation, and placed it on CreditWatch negative.

“The CreditWatch placement stems from our view that Bank RBK’s persistently low liquidity cushion leaves it less able to meet unplanned cash outflows. Since our last review in February 2017, Bank RBK hasn’t been able to improve its vulnerable liquidity position, which instead has continued to deteriorate. The bank’s regulatory coefficient of current liquidity (a liquidity measure with a three-month horizon) was only 0.11x as of May 22, 2017, significantly below the regulatory minimum of 0.30x. Similarly, its liquid assets (cash, cash equivalents, short-term interbank placements, and unpledged securities) reduced to 4.2% of total assets as of May 22, 2017, from 15% as of Dec. 31, 2016,” said the agency.

As a result, the agency revised its assessment of the bank’s liquidity position to moderate from adequate. Its views of Bank RBK’s moderate business and risk positions, weak capital and earnings, and average funding are unchanged.

“Our long-term rating on the bank remains at ‘B-‘, in line with our “Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘ And ‘CC’ Ratings.” This is because we currently do not foresee a default within the next several months, due to limited planned funding repayments during that period. Nevertheless, we put our ratings on CreditWatch because we believe that the bank’s modest liquidity buffer makes it vulnerable to the risk of unexpected cash outflows, which could challenge the bank’s sustainability in the medium term,” said the agency.

Bank RBK’s borderline local regulatory capital adequacy ratio (k2) of 10.3% as of May 1, 2017, compared with the regulatory minimum of 10%, further limits its financial flexibility in the event of unexpected adverse financial changes. The bank expects to receive external financial support (from the National Bank of Kazakhstan or shareholders) within the next three months, which will boost liquidity. However, this support, which was planned for the first quarter of 2017, has not yet been provided. “Still, we cannot exclude the possibility that the regulator’s support might come within the scope of Bank RBK’s recently announced plan to merge with Qazaq Banki (B-/Negative/B),” said the expert.

“We raised our short-term rating on Bank RBK solely based on the application of our revised methodology for linking long- and short-term ratings. That action does not reflect any change in our assessment of the bank’s credit quality.The CreditWatch placement reflects our view that Bank RBK’s persistently low liquidity cushion leaves it less able to meet unplanned fund outflows. We will likely downgrade the bank within the next three months if it does not significantly strengthen its liquidity buffer to well above the regulatory minimum, thereby enabling it to better meet unforeseen liquidity outflows. While less likely, a downgrade could be hastened by any material unplanned deposit outflows that deplete the bank’s sparse liquidity resources before support is provided.We would likely affirm the ratings if Bank RBK received sufficient shareholder or state support that allowed it to increase liquid assets sustainably to at least 10% of total assets and regulatory liquidity ratios to comfortably above the regulatory minimum,” said the experts.