September 28, 2017 / 2:58 PM / a year ago

Fitch Downgrades Eximbank Kazakhstan to 'CCC'; off RWN

(The following statement was released by the rating agency) MOSCOW, September 28 (Fitch) Fitch Ratings has downgraded Eximbank Kazakhstan's (Exim) Long-Term Issuer Default Ratings (IDRs) to 'CCC' from 'B-' and removed them from Rating Watch Negative (RWN). A full list of rating actions is at the end of this commentary. KEY RATING DRIVERS - IDRS, VIABILITY RATING, NATIONAL RATING The downgrade primarily reflects the limited improvement in Exim's tight liquidity position, and continued pressure on the bank's capitalisation from weak asset quality and core earnings. Reported non-performing loans (NPLs) were a low 1% of gross loans at end-8M17, but restructured loan ratio remained high at about 59% of gross loans (end-2016: 3% and 57%). The weak underlying performance of Exim's loan book is highlighted by a high, and increasing, accrued interest-to-gross loans ratio of 39.5% at end-1H17 (end-2016: 36%) compared with the 9.4% average in the banking system. Most restructured loans are related either to energy infrastructure projects developed by the bank's shareholders or to legacy construction projects. Given the multiple delays in completion of these projects, loan recovery prospects are very uncertain. Reserves covered only about 27% (end-2016: 28%) of NPLs and restructured loans, while the unreserved part was equal to a high 2.4x regulatory capital at end-8M17. Reported profitability weakened further, with return on average assets (ROAA) and on equity (ROAE) for 1H17 of 0.1% and 0.6%, respectively, down from 0.3% and 1.4% in 2016. Fitch calculates that, net of accrued interest, the bank has been making pre-impairment losses for several years. Reported capital ratios are rather high, with regulatory core and total standing at 16.3% and 18.4%, respectively, at end-8M17, but these should be viewed together with the high-risk and under-provisioned loan book. Exim's liquidity remains very tight. As of mid-September 2017, the bank's liquidity buffer was about KZT12 billion compared with KZT14 billion of wholesale borrowings maturing in October-November 2017, of which KZT10 billion from the National Bank of Kazakhstan (NBK) comes due in November 2017, underlining the need to attract new funding or refinance maturing obligations. Fitch estimates that Exim needs to maintain a minimum about KZT3 billion of net liquid assets to comply with minimum regulatory liquidity requirements. According to management, the bank plans to strengthen its liquidity by attracting additional deposits from affiliated companies in October 2017. However, related-party deposits proved unstable in mid-2016, when lumpy withdrawals resulted in a liquidity squeeze and the bank required significant funding support from the NBK to strengthen its liquidity. SUPPORT RATING FLOOR AND SUPPORT RATING Exim's Support Rating of '5' reflects Fitch's view that support from the bank's private shareholders, although possible, cannot be relied upon. In Fitch's view, the propensity of sister company, JSC Central-Asian Electric-Power Corporation (CAEPCo, B+/Stable), to provide support remains uncertain. The Support Rating Floor of 'No Floor' reflects the bank's low systemic importance. SENIOR UNSECURED DEBT RATING Exim's senior unsecured local debt rating is aligned with the bank's Long-Term Local-Currency IDR and National Long-Term Rating and reflects Fitch's view of significant uncertainty about the level of recoveries in the event of a default. Fitch has withdrawn an expected rating for the bank's forthcoming senior unsecured debt issue as the latter is no longer expected to proceed as previously envisaged. RATING SENSITIVITIES A liquidity squeeze resulting in Exim's inability to repay or refinance maturing obligations would lead to a downgrade. Increased pressure on capital from further asset quality deterioration, regulatory requirements to increase reserve coverage or a significant structural weakening of profitability would also be credit-negative. Conversely, notable improvements in the aforementioned areas would reduce pressure on the ratings. The rating actions are as follows: Long-Term Foreign- and Local-Currency IDRs: downgraded to 'CCC' from 'B-'; off RWN Short-Term Foreign-Currency IDR: downgraded to 'C' from 'B'; off RWN National Long-Term Rating: downgraded to 'B(kaz)' from 'B+(kaz)'; off RWN Viability Rating: downgraded to 'ccc' from 'b-'; off RWN Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt ratings: downgraded to 'CCC/B(kaz)' from 'B-'/'B+(kaz)', Recovery Rating at 'RR4'; off RWN Senior unsecured debt ratings: downgraded to 'CCC(EXP)/B(kaz)(EXP)' from 'B-(EXP)'/'B+(kaz)(EXP)', off RWN, and withdrawn Contact: Primary Analyst Roman Kornev Director +7 495 956 0979 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Maria Kuraeva Associate Director +7 495 956 9901 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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