Moody’s changes outlook on ForteBank’s ratings to positive from stable

Moody's changes outlook on ForteBank's ratings to positive from stable

Moody’s Investors Service has changed the outlook on ForteBank JSC’s long-term deposit and senior unsecured debt ratings to positive from stable and affirmed the following ratings: the long-term local and foreign-currency deposit ratings at B3, long-term local and foreign-currency senior unsecured debt ratings at Caa1 and the long-term local currency subordinated debt rating at Caa2.

The change of the outlook to positive from stable reflects the gradual improvement in the bank’s asset quality indicators and reserves coverage, underpinned by progress in the recovery of legacy problem loans. Additionally, the bank has maintained a solid capital buffer and has strengthened deposit base. At the same time, the bank’s current BCA at caa1 is still constrained by its high level of problem loans and low reserves coverage.

ForteBank’s total problem loans (individually impaired corporate loans plus retail loans and SME loans that are more than 90 days overdue) decreased to 31.7% of gross loans as of 1 July 2017 from 33.8% as of the end of 2016. Loan loss reserves (LLRs) coverage is gradually increasing, supported by inflows from legacy problem-loan recoveries. Starting from 2014, the bank recovered KZT183.6 billion or 20.5% of the peak of legacy problem loans (reported at end 2015). Of this amount around 60% was in cash. Proceeds from recoveries of written off loans reduce the bank’s impairment charges and consequently underpin profitability. LLRs coverage of problem loans has improved to 26.4% as of H1 2017 from 24.3% in 2016 (19.7% in 2015), which is still insufficient by Moody’s view. The bank’s modest problem loan coverage by reserves is driven by its expectations of a recovery of most problem loans based on discounted collateral value.

ForteBank reported a sustainable level of profitability for the past two years. Its annualized return on average assets was 1% as of H1 2017 and we expect it to report the same financial results at the end 2017. The bank’s bottom-line profitability was supported by growing fees and commission income (which increased to 15% of operating revenues in mid-2017), healthy net interest margin of 3.7% and gains from recovery of legacy problem loans.

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