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

Kazakhstan-based Halyk Bank ratings affirmed and Kazkommertsbank ratings put on watch positive on planned merger - S&P

S&P Global Ratings revised its outlook on Kazakhstan-based JSC Eurasian Bank to negative from stable. The agency affirmed its ‘B/B’ long- and short-term counterparty credit ratings on the bank. The agency also affirmed its long-term Kazakhstan national scale rating of ‘kzBB’.

“The outlook revision reflects our view that Eurasian Bank’s capitalization might be negatively affected by the operating environment in Kazakhstan. Although we understand that the bank’s shareholders are currently expressing their willingness to support the bank via additional equity inflows, we can’t exclude the possibility that their propensity to support the bank might diminish. We now see higher probability of such a scenario–although it’s not our base case–because of the continued adverse economic environment in Kazakhstan and volatile commodity prices, which expose affiliated metals and mining company Eurasian Resources Group (ERG; CCC+/Stable/C) to respective risks,” said the agency.

In addition, the bank’s volatile profits over the past two years and the experts’ expectations of weak financial results over the coming 12-18 months put the spotlight on Eurasian Bank’s ability to maintain moderate capitalization. This factor is one of the major rating constraints.

During 2016, Eurasian Bank’s capitalization was strengthened by a Kazakhstani tenge (KZT) 15 billion capital injection from current shareholders, which resulted in a risk-adjusted capital (RAC) ratio of 5.1% as of Dec. 31, 2016. Under the base case for the next 12-18 months, the experts expect shareholders to provide additional injections. Therefore, the agency projects its RAC ratio will remain higher than 5.25% over the same period.

“We view the bank’s quality of earnings as weak, owing to volatility of earnings throughout the financial year. We also understand that the bank’s ability to earn sustainable profits over the past two years was significantly impaired by challenging operating conditions in Kazakhstan and we expect this to continue over the coming 12-18 months,” said the agency.

This negatively affects the bank’s business stability and therefore we assess Eurasian Bank’s business position as moderate only. On the positive side, the agency view is balanced by the bank’s leading market positions in consumer lending, especially auto loans, its risk-averse strategy, and its relatively diversified business model.

“In addition, we believe that possible unexpected pressures on funding and liquidity, in light of an uncertain external environment and Eurasian Bank’s significant planned repayments over the next 12 months, might distort the stability of Eurasian Bank’s operations. We can’t exclude this possibility and reflect it in the negative outlook as well. This is because we have observed that some small and midsize banks in Kazakhstan have experienced unforeseen outflows of funding, including deposits from government-related entities, since the beginning of 2017,” said the experts.

“Finally, our assessment of the risk position is currently moderate, which is in line with the majority of other banks we rate in the country. The bank’s reported quality of assets as well as its amount of potentially problem loans is broadly commensurate with the system averages. According to IFRS, the bank’s share of nonperforming loans (overdue more than 90 days) represented 12.8% of total lending on March 31, 2017, compared with 10.5% at year-end 2015. We expect this ratio to fluctuate in the range of 12%-14% over the next 12-18 months. By our estimations, potential problem exposures might form an additional 19% of loans, including 13% that are restructured loans,” said the experts.

The negative outlook on Eurasian Bank reflects the concerns that the shareholders’ willingness or ability to support the bank’s loss absorption capacity might diminish over the next 12-18 months or that the bank might face unforeseen liquidity shortages amid the negative and unpredictable operating environment in Kazakhstan.