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

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

S&P Global Ratings said that it has affirmed its ‘BB/B’ long- and short-term issuer credit ratings on Halyk Savings Bank of Kazakhstan (Halyk Bank). The outlook remains negative, reports the rating agency.

The agency has also affirmed our ‘kzA’ Kazakhstan national scale rating on Halyk Bank.

“At the same time, we placed our ‘B+’ long-term issuer credit rating and ‘kzBBB-‘ Kazakhstan national scale rating on Kazkommertsbank JSC (KKB) on CreditWatch with positive implications. We affirmed the ‘B’ short-term issuer credit rating on KKB,” reads the statement.

The rating actions follow Halyk Bank’s announcement on Dec. 15, 2017, that its board of directors has approved the merger of KKB into Halyk Bank. The merger is expected to be finalized in the second half of 2018, subject to regulatory approvals and finalization of a number of corporate governance procedures.

“We believe that Halyk Bank’s financial profile will remain largely stable after possible capital outflows from minority shareholders during the upcoming group reorganization. Minority owners now hold 19.95% of Halyk Bank’s overall share capital. Under Kazakhstan’s regulation, Halyk Bank has an obligation to buy out the stakes of minority shareholders that vote against the merger,” reads the report.

“We assess Halyk Bank’s capital and earnings as moderate, reflecting our expectation that the combined bank will be able to sustain sound profitability that would ease the pressure on its consolidated capital adequacy from the acquisition of undercapitalized KKB in the middle of 2017. We forecast that Halyk Bank’s risk-adjusted capital (RAC) ratio will be in the range of 6.5%-7.5% during the next 12-18 months. This is an improvement from the 5.7% we calculated as of Oct. 1, 2017, based on accounts under International Financial Reporting Standards that consolidate KKB,” reads the report.

The agency sees Halyk Bank’s business position as strong. This assessment balances the bank’s leading share of Kazkahstan’s banking market, sound business diversification, and experienced management team with a proven track record of stable performance through the economic cycle, against risks related to the integration of KKB, which is still burdened by legacy problem assets.

“We think the integration of KKB may become a challenge for Halyk Bank, taking into account KKB’s much weaker credit standing and the still-weak economic conditions in Kazakhstan. Halyk Bank’s management has yet to demonstrate that it is able to establish sound internal control and risk-management systems in the business lines transferred from KKB and turn them into sustainably profit-generating operations. We could revise our assessment of Halyk Bank’s business position downward if we considered that its currently strong profitability and business stability are undermined by KKB, which it will fully integrate in 2018,” reads the report.

Following the acquisition of KKB, Halyk Bank has a dominant position in Kazakhstan’s banking sector, accounting for about 28% of systemwide loans and 35% of total deposits on Nov. 1, 2017. It also has the largest distribution network in Kazakhstan with more than 700 branches (Halyk Bank and KKB combined) throughout the country. The bank benefits from an experienced management team, which has demonstrated stable financial performance over the economic cycle, supported by strong pricing power, low cost of funds, and satisfactory risk-management systems and procedures.

The bank’s risk profile has weakened, in view of KKB’s high exposure to the problem real estate and construction sector, high single-name exposures, and substantially worse asset quality than that of Halyk Bank. “ We estimate that Halyk Bank’s exposure to the real estate and construction sector has increased to around 20% of total loans as of Oct. 1, 2017, from around 13% at the end of 2016. We note, however, that the current exposure is generally in line with that of Kazakh peer banks,” reads the report.