Moody’s Upgrades Kazkommertsbank’s Deposit Ratings To Ba2 From B3 And Halyk’s To Ba1 From Ba2

Moody's Upgrades Kazkommertsbank's Deposit Ratings To Ba2 From B3 And Halyk's To Ba1 From Ba2

Rating actions prompted by the recently announced government support to Kazkommertsbank and its subsequent takeover by Halyk

London, 27 June 2017 — Moody’s Investors Service has today upgraded Kazkommertsbank’s (KKB) deposit ratings to Ba2 from B3, senior unsecured debt rating to B1 from Caa2 and baseline credit assessment (BCA) /Adjusted BCA to b3/b1 from ca/ca. The rating agency also upgraded to Ba1 from Ba2 Halyk Savings Bank of Kazakhstan’s (Halyk) deposit ratings and affirmed its ba3 BCA/Adjusted BCA and Ba3 senior unsecured debt ratings. The outlook on both banks’ long-term ratings is now negative, in line with the outlook on the sovereign rating of Kazakhstan.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

— KAZKOMMERTSBANK

The upgrade of Kazkommertsbank’s BCA to b3 from ca and its long-term deposit ratings to Ba2 from B3 is driven by the Kazakhstan authorities’ decision to: (1) provide the bank with substantial financial support to address its solvency problems related to its high stock of problem assets; as well as (2) its takeover by Halyk, which will then inject additional capital into Kazkommertsbank.

Government authorities will provide financial support to BTA, Kazkommertsbank’s largest borrower, to fully repay is KZT2.4 trillion loan that was a major contributor to Kazkommertsbank’s capital shortfall. Halyk will inject KZT185 billion of additional capital to cover the additional expected impairment of Kazkommertsbank’s remaining assets. Moody’s expects that the government support package will ultimately enable the recovery of Kazkommertsbank’s regulatory capital ratios above regulatory minima, while eliminating additional asset impairment risks, thus materially enhancing its solvency. This will also provide considerable liquidity to Kazkommertsbank, enabling it to repay expensive funding and substantially increase its interest-earning assets over time. This will thereby substantially improve its operating revenue and help the bank to achieve profitability in the longer term.

Moody’s considers that there is now a very high probability of affiliate support for Kazkommertsbank from Halyk. This is reflected in two notches of rating uplift, and the upgrade of Kazkommertsbank’s adjusted BCA to b1 from ca. Moody’s also continues to believe that there is a very high probability of government support for depositors, resulting in two notches of rating uplift, leading to the Ba2 long-term deposit ratings of KKB.

— HALYK SAVINGS BANK OF KAZAKHSTAN (Halyk)

The affirmation of Halyk’s ba3 BCA and Ba3 senior unsecured debt ratings reflects the balance of drivers that affect Halyk’s financial metrics following its takeover of recapitalized but yet weaker Kazkommertsbank.

While government support to Kazkommertsbank substantially reduces acquisition risks for Halyk, the transaction will increase Halyk’s risk-weighted assets. It also reduces its standalone capitalisation given the KZT185 billion injection into Kazkommertsbank. As a result, Halyk’s current very strong consolidated Tangible Common Equity to Risk Weighted Assets ratio of 18.7% (Moody’s adjusted; YE2016) will deteriorate. This, however, is offset by Halyk’s very strong ongoing earnings that should enable the bank’s solvency metrics to recover over the next 12 to 18 months: the rating agency expects Halyk to report annual net income at above 2% of its consolidated risk weighted assets. This, and the recently announced plans to sell a 60% stake in Altyn Bank JSC, its local subsidiary, should enable Halyk to consolidate its TCE/RWA ratio at above 16% by YE2018, assuming no dividend payouts. As a result, Moody’s expect Halyk’s financial profile to remain commensurate with a BCA of ba3, i.e. where it is currently positioned.

Moody’s upgrade of its deposit ratings to Ba1 from Ba2 reflects Halyk’s increased systemic importance following the takeover of Kazkommertsbank, which is the country’s second largest bank by deposits. Kazkommertsbank’s consolidation into Halyk should enable the latter to become an undisputed leader in Kazakhstan and secure a dominant market position with about 35% in deposits and about 30% in loans. Moreover, government support to Kazkommertsbank signals authorities’ increasing readiness to support the country’s largest lenders in case of need, and demonstrates the government’s strong commitment and readiness to allocate funds to restore the system’s creditworthiness while consolidating the banking system. As a result, our revised assumption of a “very high” probability of government support now translates into two notches of uplift, compared to one notch previously. In reassessing potential support for depositors, Moody’s affirmed Halyk’s Ba3 senior unsecured debt ratings, reflecting a continued low probability of government support. Moody’s existing approach of rating Kazakh banks’ debt reflects the history of previous resolutions in Kazakhstan and, more recently, in some other regions where public funds have been injected to bail-out depositors of failed banks while debt holders are more likely to suffer losses.

— OUTLOOKS

Negative outlook on Halyk’s long-term ratings is driven by the negative outlook assigned to the Baa3 sovereign rating of Kazakhstan. As such, any deterioration in the creditworthiness of Kazakhstan could lead to a downgrade of Halyk’s long-term ratings, in view of lower government support uplift and increased asset risks, given the substantial direct exposure of both banks to the sovereign-related debt. Kazkommertsbank’s long-term debt and deposit ratings and Halyk’s BCA and debt ratings could also be downgraded if, following Kazkommertsbank’s consolidation, Halyk’s financial profile does not recover in line with the agency’s expectations.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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