Kazakhstan-Based ATF Bank ‘B’ and ‘kzBB’ ratings placed on CreditWatch Negative on asset wuality concerns- S&P

Kazakhstan: Credit Rating

S&P Global Ratings has placed its ‘B’ long-term counterparty credit rating and ‘kzBB’ Kazakhstan national scale rating on ATFBank JSC on CreditWatch with negative implications. At the same time, the agency affirmed our ‘B’ short-term credit rating on the bank.

“The CreditWatch placement follows our observation that ATFBank’s asset quality indicators did not improve as much as we previously expected despite the bank management’s ongoing efforts to recover legacy problem loans,” said the experts.

The bank’s estimated nonperforming loans (NPLs; loans overdue by 90 days or more) and foreclosed assets, together accounting for about 29% of total loans under International Financial Reporting Standards (IFRS), appear worse compared with those of local peers and peers operating in countries with similar economic risks. In addition, the provisioning coverage ratio has decreased to about 47% as of end-2016, which we consider very low for an environment such as the one in Kazakhstan.The bank may have to create material additional new loan loss provisions in 2017-2018.

“We are aware that the government recently announced a plan to introduce a recapitalization program to support some large and midsize banks in Kazakhstan. We understand that government support will be provided to banks that meet the minimum capital requirement of Kazakhstani tenge (KZT) 45 billion (US$134 million) and possibly some other criteria in the form of Tier 2 long-term subordinated loans. We also understand that shareholders will be obliged to provide capital support to banks through a new capital injection or retention of profits in case they request government support. Furthermore, we understand that the amount of potential support will be defined based on the results of the asset quality review recently performed by the National Bank of Kazakhstan (NBK). At this stage, little clarity is available on the terms of this program, including the total amount, the banks to receive support, and the support breakdown between banks, among other terms. In addition, the NBK has not released the results of its asset quality review,” said the agency.

Consequently, the agency has no official confirmation that ATFBank is included in the list of banks to receive capital support or of the potential amount and terms of such support. Also, the agency does not have sufficient clarity on the amount of additional provisions the NBK might require the bank to create following the asset quality review.

“We think that recovery of problem assets will remain a challenge for ATFBank’s management given the current difficult operating environment for Kazakh banks. In the absence of additional support from the government and the controlling shareholder, the bank’s recent asset quality performance was worse than we previously expected, and that of peers. The bank’s NPLs under IFRS amounted to 22.2% of gross total loans on Dec. 31, 2016, and were covered by provisions by only 66.6%, which is low compared to peers. In addition, the bank’s foreclosed assets amounted to a sizable 6.5% of total loans on the same date. The bank did not have as much success in problem loans restructuring as we previously expected for 2017,” said the experts.

Furthermore, the agency sees a risk that single-name concentrations of ATFBank’s loan book are quite high with the top-20 borrowers accounting for 41.4% of gross total loans and 3.8x total adjusted capital net of provisions as of March 31, 2017. Loan concentration in the risky construction and real estate sectors is also high, with about 27% of total loans on the same date, which is higher than that of local or international peers.

Positively, ATFBank enjoys healthy liquidity and funding profiles. The bank’s funding is dominated by customer deposits and we expect these to remain sticky in the next 12-18 months. The bank has a sizable liquidity cushion, with liquid assets accounting for around 35% of total assets as of April 1, 2017.

The bank acts as a net lender in the interbank market, in particular in U.S. dollars.

“We could lower the rating on ATFBank if we considered that the bank is unlikely to reduce the level of its NPLs below 15% of total loans or if we consider the loan loss provisioning coverage is less than adequate within the next 12-18 months. We would also take a negative rating action if the bank’s capitalization, as measured by our risk-adjusted capital (RAC) ratio, fell below 3% due to the need to create material new provisions, faster-than-currently-expected loan growth, or other negative developments of risk-adjusted capitalization not adequately compensated by capital inflows from the shareholder and/or the government. We could also downgrade the bank if we think that it is less likely to receive the extraordinary support from the government than we currently envision.

We could affirm the ratings on ATFBank if we considered that the government and shareholder support helped the bank stabilize its asset quality and capitalization with the share of NPLs decreasing to below 15%, while its capitalization measured by our RAC ratio remained sustainably above 3%,” reads the report.

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