Fitch Upgrades Halyk to 'BB', Affirms KKB at 'B', Maintains BTA on RWP

Thu Jan 23, 2014 11:36am EST

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(The following statement was released by the rating agency) LONDON/MOSCOW, January 23 (Fitch) Fitch Ratings has upgraded Halyk Bank of Kazakhstan’s Long-Term Issuer Default Ratings (IDRs) to ‘BB’ from ‘BB-’ and removed the ratings from Rating Watch Evolving (RWE). The Outlook is Stable. The agency has also affirmed Kazkommertsbank’s (KKB) Long-term IDRs at ‘B’ with Stable Outlook and maintained BTA Bank’s ‘CCC’ Long-term IDRs on Rating Watch Positive (RWP). A full list of rating actions is at the end of this rating action commentary. The rating actions follow the recent statements of Halyk, KKB and Kazakhstan’s National Welfare Fund Samruk Kazyna (SK), outlining that (i) Halyk and SK have terminated negotiations on Halyk’s potential acquisition of BTA; and (ii) SK currently plans to sell a controlling stake in BTA to KKB and a private investor, with the intention that KKB and BTA will ultimately merge. KEY RATING DRIVERS – HALYK The upgrade of Halyk’s Long-Term IDRs to ‘BB’ reflects that the termination of the BTA deal has eliminated downside risks for Halyk’s credit profile. In April 2013, Fitch stated that the bank’s standalone profile warranted ‘BB’ Long-term IDRs, but that Halyk would only be upgraded if the potential acquisition of BTA did not go through. In Fitch’s view, Halyk’s standalone credit profile has remained largely unchanged over the past three quarters. Halyk’s Long-term IDRs are based on its Viability Rating (VR) of ‘bb’, which reflects the bank’s strong nationwide franchise, solid profitability and capitalisation, comfortable liquidity position and limited refinancing risks. However, the ratings also factor in still high levels of non-performing and restructured loans, the relatively high-risk operating environment and potential additional loan impairment reserves, which in Fitch’s view, may be required on some of the riskier loan exposures. Halyk’s asset quality remains somewhat better than most large Kazakh banks as a result of its less aggressive pre-crisis underwriting and lower exposure to the real estate sector. Non-performing loans (NPLs; more than 90-day overdue), were equal to 18% of loans at end-9M13 and fully covered by reserves, but downside risks result from restructured loans (10% of the portfolio) and higher risk acquisition finance exposures (12%). Capital levels are adequate and supported by robust internal capital generation. The Fitch core capital (FCC)/weighted risks ratio was a solid 14.9% at end-9M13 (Basel II Tier 1 ratio: 17.5%), and regulatory Tier I and Total capital adequacy ratios (CARs) were 11.6% and 17.5%, respectively, at end-November 2013. The regulatory capital buffer at end-9M13 was sufficient for Halyk to create reserves equal to an additional 9% of gross loans without breaching minimum capital requirements, and annualised pre-impairment profit (PIP) was equal to a further 6.1% of gross loans, indicating considerable loss absorption capacity. Halyk’s consistently strong performance reflects the bank’s reasonable risk pricing, the significant share of high-margin retail business, moderate funding costs, diversified and stable fee earnings and efficiencies of scale. Impairment charges fell to 16% of PIP in 9M13 from 82% in 2009 as a result of asset quality stabilisation supported by the favourable macroeconomic backdrop. Liquidity is comfortable due to the high level of liquid assets (mainly bank placements and eligible securities), strong customer franchise and limited wholesale debt. Liquid assets were equal to USD4bn or 35% of customer accounts at end-November 2013. No significant repayments are due in 2014 as senior bonds mostly mature in 2017 (USD0.6bn) and 2021 (USD0.5bn). However, funding is weakened by the high dependence on large depositors, most notably one oil and gas group of companies, which accounted for 22% of customer funding at end-9M13. Halyk’s high systemic importance and political connections make moderate state support possible, as reflected by its ‘B’ Support Rating Floor (SRF) and ‘4’ Support Rating (SR). The multi-notch difference between the sovereign rating at ‘BBB+’ and Halyk’s SRF reflects Fitch’s view that large-scale capital support would be unlikely to be forthcoming for any Kazakh commercial banks, given the recent history of defaults at other institutions. RATING SENSITIVITIES – HALYK Halyk could be upgraded if the bank makes tangible progress with workouts of problem loans and further strengthens its capitalisation through continued robust internal capital generation. The ratings could be downgraded if asset quality or capitalisation deteriorated sharply. KEY RATING DRIVERS – BTA Fitch has maintained BTA’s ‘CCC’ Long-term IDRs and senior debt rating on RWP to reflect the potential benefits of the planned acquisition by, and merger with, KKB. The ratings reflect the bank’s weak asset quality, capitalisation and performance. Fitch has been informed that no further restructuring of BTA or balance sheet clean-up is planned prior to the acquisition by KKB. BTA’s reported FCC and Basel Tier I capital ratios were a high 26% at end-9M13. However, fair-value adjustments (reductions) to the bank’s low-rate liabilities (a loan from SK and the bank’s Eurobonds) accounted for a large 61% of FCC, and this will have to be accrued back through the income statement in future periods, putting pressure on internal capital generation. NPLs were a high 88% of gross loans at end-9M13. Reserve coverage was 86%, but the unreserved part was still equal to a sizable 109% of FCC, indicating potential further pressure on capital. Partially reserved NPLs comprise mainly Kazakhstan-domiciled projects, rather than offshore exposures. The bank’s book of mostly illiquid equity investments (22% of FCC) is a further source of valuation risk. Liquidity is currently comfortable, and the bank’s Eurobonds only mature in 2022. Fitch understands that KKB is discussing with the Kazakh authorities the retention of BTA’s large repo facility from the National Bank of Kazakhstan (current utilisation equal to 34% of liabilities) and sizable funding from SK (18% of liabilities) following the acquisition and merger. BTA’s performance improved moderately in 9M13 as a result of a significant reduction in operating expenses. However, PIP, net of accrued loan interest not received in cash, was still moderately negative. RATING SENSITIVITIES – BTA Fitch expects to upgrade BTA’s Long-term IDRs and senior debt rating by one notch, to ‘B-‘, following the acquisition by KKB of a controlling stake in the bank. This would reflect the moderately improved prospects of support for BTA from its new owner. The ratings would likely remain on RWP following the upgrade, reflecting their potential to be upgraded further to ‘B’ as a result of the planned merger. The ratings could be affirmed if the planned acquisition by KKB falls through. KEY RATING DRIVERS – KKB Fitch has affirmed KKB’s Long-term IDRs at ‘B’ with a Stable Outlook, as it believes the planned acquisition of BTA should at worst be only moderately negative for KKB’s credit profile. KKB’s ratings continue to reflect the bank’s weak asset quality and the potential need for further provisioning of its problem exposures. However, the ratings also consider the bank’s significant loss absorption capacity, positive pre-impairment profit (net of accrued interest income), moderate refinancing risk and the currently comfortable liquidity. KKB’s asset quality remains weak as a result of significant real estate exposures (51% of gross loans at end-9M13), which are the main driver of the bank’s sizable NPLs (31% of loans) and restructured exposures (19%). Reserves moderately exceeded NPLs, but were insufficient to cover rescheduled loans. The FCC ratio was 12.8% at end-9M13, and the regulatory ratios stood at 11.9% (Tier 1) and 16.6% (total) at end-November 2013. Fitch calculates that the bank could have created reserves equal to 39% of loans without breaching regulatory capital requirements, which represents significant loss absorption capacity relative to the problem exposures. However, any further financing of real estate projects (which might be needed to ensure completion in some cases) could put additional pressure on capital. Pre-impairment profitability, net of accrued interest income not received in cash, was a reasonable 2.7% (annualised) of average assets in 9M13, a moderate increase from 2.4% in 2012. Performance is supported by the limited branch network and low operating expenses. Net income was moderately positive in 9M13 (return on average assets 1.2%) after a large loss in 2012 driven by the catch-up of IFRS provisions with statutory reserves. KKB’s liquidity position remains reasonable with highly liquid assets covering 24% of customer accounts at end-3Q13. Wholesale funding (mostly senior bonds) was a significant 21% of liabilities, but there are no large spikes in the repayment schedule. Fitch does not expect significant deterioration of KKB’s profile as a result of the BTA acquisition due to (i) the limited expected cost of the acquisition; (ii) the greater importance of KKB for the profile of the combined entity (KKB’s risk-weighted assets were equal to 2.3x those of BTA at end-9M13; net loans were 3.1x higher); and (iii) the significant weaknesses already in KKB’s profile, as reflected in its low ratings. Based on end-9M13 balance sheets and the expected acquisition price (and without any further revaluation of BTA’s liabilities), Fitch estimates that the two banks’ combined FCC/risk weighted assets ratio would be moderately above that reported by KKB at end-9M13 (12.8%), while the combined unreserved NPLs and restructured loans/FCC ratio would be broadly in line with the 1.5x reported by KKB. The fair value adjustments on BTA’s liabilities would be equal to 33% of the combined FCC, although these would likely reduce somewhat (and with them the combined bank's capital – to a level closer to KKB’s current 12.8% ratio) as a result of revised (lower) discount rates applied to these liabilities following the acquisition. BTA’s negative 9M13 PIP (net of accrued interest on loans) of KZT6bn was not large relative to KKB’s positive KZT53bn PIP (net of accruals). Fitch also believes that moderate improvements in BTA’s performance following the acquisition are possible, due to (i) potential operational synergies, resulting in further reduction of BTA’s expenses; and (ii) more active workouts of some of BTA’s domestic NPLs. The rating of KKB’s senior debt issued by the special-purpose vehicle Kazkommerts International BV is equalised with the bank’s Long-term IDR. Subordinated debt issues and the perpetual debt issued by KAZKOMMERTS FINANCE 2 BV are notched off KKB’s VR by one and two notches, respectively. The two-notch differential on the perpetual debt reflects its deep subordination and the possibility of coupon omissions. KKB’s ‘B-’ SRF is one notch lower than Halyk’s, reflecting the former’s smaller retail deposit franchise, higher wholesale indebtedness and weaker political connections. RATING SENSITIVITIES – KKB KKB’s VR, IDRs, and debt ratings could be downgraded if the bank’s solvency deteriorates significantly as a result of greater than expected losses on either its own or BTA’s problem assets. Successful workouts of problem loans, resulting in a strengthening of the capital position, could result in upward pressure on the ratings. The rating actions were as follows: Halyk Bank of Kazakhstan Long-term foreign and local currency IDRs: upgraded to ‘BB’ from ‘BB-’, removed from RWE; Outlook Stable Short-term foreign and local currency IDRs: affirmed at ‘B’ Viability Rating: upgraded to ‘bb’ from ‘bb-’, removed from RWE Support Rating: affirmed at ‘4’ Support Rating Floor: affirmed at ‘B’ Senior unsecured debt rating: upgraded to ‘BB’ from ‘BB-’; removed from RWE Kazkommertsbank: Long-term foreign and local currency IDRs: affirmed at ‘B’; Outlook Stable Short-term foreign and local currency IDRs: affirmed at ‘B’ Viability Rating: affirmed at ‘b’ Support Rating: affirmed at ‘5’ Support Rating Floor: affirmed at ‘B-’ Senior unsecured debt: Long-term rating affirmed at ‘B’, Short-term rating affirmed at ‘B’ Subordinated debt rating: affirmed at ‘B-’ Kazkommerts International BV: Senior unsecured debt rating: affirmed at ‘B’ KAZKOMMERTS FINANCE BV: Perpetual debt rating: affirmed at ‘CCC’ BTA: Long-term foreign and local currency IDRs: ‘CCC’, maintained on RWP Short-term foreign and local currency IDRs: ‘C’, maintained on RWP Viability Rating: ‘ccc’, placed on RWP Support Rating: affirmed at ‘5’, removed from RWP Support Rating Floor: affirmed at ‘No Floor’ Senior unsecured debt: ‘CCC’, maintained on RWP Contact: Primary Analyst Roman Kornev (Halyk, BTA, KKB) Associate Director +7 495 956 7016 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst (Halyk, BTA) Aslan Tavitov Associate Director +7 495 956 7065 Secondary Analyst (KKB) Konstantin Yakimovich Analyst +7 495 956 9978 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Recovery Ratings for Financial Institutions', dated 24 September 2013 ,'Assessing and Rating Bank Subordinated and Hybrid Securities', dated 05 December 2012, 'National Scale Ratings Criteria', dated 30 October 2013 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Recovery Ratings for Financial Institutions here Assessing and Rating Bank Subordinated and Hybrid Securities here National Scale Ratings Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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