Kazakhstan-Based Halyk Bank And Kazkommertsbank Ratings Now On CreditWatch On Very High Likelihood Of Acquisition

Kazakhstan: Credit Rating

FRANKFURT (S&P Global Ratings) June 14, 2017–S&P Global Ratings said today that it has placed its ‘BB’ long-term counterparty credit rating and ‘kzA’ Kazakhstan national scale rating on Halyk Savings Bank of Kazakhstan (Halyk Bank) on CreditWatch with negative implications. We affirmed the ‘B’ short-term counterparty credit rating on the bank.

The rating actions follow the signing on June 2, 2017, of a framework agreement by Kazakhstan’s government, the National Bank of Kazakhstan (NBK), Samruk-Kazyna, JSC Problem Loans Fund (PLF), Halyk Bank, BTA Bank J.S.C., KKB, and Kenges Rakishev, KKB’s largest shareholder, setting terms for the acquisition of KKB by Halyk Bank. We now factor in the possibility of the deal into our ratings on Halyk Bank and KKB, assuming that the acquisition is very likely to go ahead.

We placed our long-term rating on Halyk Bank on CreditWatch negative because we think that the acquisition of KKB, which has a significant legacy problem-assets portfolio, might weaken Halyk Bank’s creditworthiness. KKB is

the second largest bank in Kazakhstan following its acquisition of BTA Bank in 2014. We view Halyk Bank to be more risk-averse than peer Kazakh banks, as demonstrated by its track record of solid capitalization and earnings generation. In contrast, KKB has a history of financing speculative real estate deals before the 2008 financial crisis, frequent changes of management teams over the past few years, low capitalization, and weak profitability. We believe that it might take considerable time and managerial effort to establish solid internal control and risk management systems throughout the combined organization. We expect that following the acquisition, Halyk Bank’s consolidated nonperforming loans (NPLs; loans more than 90 days overdue) might increase to more than 20% of total loans from the 9.8% Halyk Bank reported at year-end 2016.

Positively, we also expect that Halyk Bank’s consolidated funding profile will remain strong. Halyk Bank and KKB enjoy strong retail deposit franchises in Kazakhstan, with a joint market share of 38% as of May 1, 2017. We expect Halyk Bank’s liquidity will remain adequate, supported by extensive government funds.

We revised the implications of our CreditWatch on KKB to developing to reflect the upside to KKB’s creditworthiness if it is acquired by the much stronger Halyk Bank. In particular, we expect KKB’s creditworthiness could benefit from the following measures that are intended to be part of the acquisition deal:

BTA Bank’s repayment of its KZT2.4 trillion obligation to KKB, backed by government support through PLF; and Halyk Bank’s likely provision of additional capital to KKB. After the acquisition, we anticipate that KKB will become a subsidiary of Halyk Bank, and our long-term rating on KKB could therefore potentially benefit from uplift for group support.

However, at this stage it is not possible to determine KKB’s potential group status or the likelihood of support from Halyk Bank. At the same time, there is uncertainty about the source and timing of solvency support to KKB if the acquisition by Halyk Bank does not go through.

We do not see KKB’s current financial position as sustainable in the long term. CREDITWATCH Halyk Bank We aim to resolve the CreditWatch on completion of KKB’s acquisition by Halyk Bank, which we expect will happen within the next three months.

We will lower our ratings if, following the acquisition, we consider that Halyk Bank’s creditworthiness has substantially weakened.

This could result from the need to create substantial additional loan loss provisions at KKB or from deterioration of Halyk Bank’s risk position after incorporating KKB, with the combined entity having substantially worse loan asset quality than the banking sector average.

We could affirm our ratings if, after the acquisition, we believed the pressure on Halyk Bank’s stand-alone credit profile is offset by extraordinary government support, reflecting the combined entity’s high systemic importance.

If the acquisition did not materialize, we would likely affirm our ratings on Halyk Bank and assign a negative outlook, owing to heightened risk from relatively high levels of overdue and restructured loans. Kazkommertsbank We would likely upgrade KKB if the acquisition by Halyk Bank restored KKB’s capital to the regulatory minimum, and we consider that Halyk Bank will integrate KKB into its business, remain committed to KKB as its subsidiary, and support KKB if needed.

In contrast, we could lower the ratings if, within the next three months, KKB’s recapitalization does not take place. Absence of or delays in providing additional capital would imply an increased possibility of KKB defaulting on some or all of its debt, in our view.

We could also lower the ratings if, contrary to our current view, we see increased prospects of a selective default, for example through restructuring of KKB’s foreign debt as part of a solvency support package.