Fitch affirmed Kazkommertsbank’s ratings at ‘BB+’ downward pressure on ‘C/D’ individual rating

business and economy

Fitch affirmed Kazkommertsbank’s ratings at ‘BB+’ downward pressure on ‘C/D’ individual rating

By SRI ⋅ July 9, 2008 ⋅

(Fitch Ratings) - Fitch Ratings has today affirmed Kazakhstan-based Kazkommertsbank’s (KKB) ratings at Long-term foreign currency Issuer Default rating (IDR) ‘BB+’, Short-term IDR ‘B’, Long-term local currency ‘BBB-’ (BBB minus), Short-term local currency IDR ‘F3′, Individual ‘C/D’, Support ?’ and Support Rating Floor ‘BB+’. The Outlooks for both Long-term IDRs remain Negative.

KKB’s IDRs and Support rating reflect the moderate probability that support would be forthcoming from the Kazakhstani authorities in case of need, given the bank’s substantial domestic franchise. The Negative Outlooks on the Long-term IDRs reflect those on the ratings of the Kazakh sovereign (local currency ‘BBB+’, foreign currency ‘BBB’).

Although affirmed at present, KKB’s Individual rating is now under significant downward pressure. This reflects the ongoing increase in loan impairment levels and generally heightened level of credit risk currently faced by the bank, as a result of high construction sector and individual borrower concentrations in a tough credit environment. Reliance on external funding is also high, although near-term refinancing risk is moderate, in Fitch’s view, and liquidity is currently adequate. The rating also considers KKB’s strong franchise and sound pre-impairment performance to date.

The agency notes significant asset quality deterioration in the bank’s loan book, beginning in H207. The proportion of individually-assessed loans falling into the Doubtful 5 and Loss regulatory categories (which should capture most loans overdue by 60 days or more) has increased to 6.8% at end-May 2008 from 2.1% at end-June 2007 (6.1% at end-Q108 and 4.8% at end-2007). The proportion of loans overdue by more than 90 days was 3.7% at end-March 2008, up from 0.9% at end-June 2007 (2.9% at end-2007). Fitch also notes the sharp increase in the proportion of individually-assessed loans falling into the Doubtful 2/4/5 and Loss regulatory categories (which should capture most loans overdue by seven days or more): these loans rose to 16.9% at end-May 2008 from 12.1% at end-Q108 and 7.6% at end-2007 (end-H107: 4.4%). While some of these loans may only be technically overdue and soon become current again, the sharp rise in this ratio suggests a likely further increase in the proportion of deeply impaired loans in the future. Generally, the increase in loan impairment, initially driven mainly by seasoning, is now apparently stemming primarily from problems in the troubled local construction and real estate sectors, as well as the overall weakening of growth rates in the Kazakh economy.

“Although KKB has some capital and earnings capacity to absorb additional loan impairment charges,” says Alexei Kechko, Director in Fitch’s Financial Institutions Group, “a continuation of the current negative asset quality trends would likely lead to a downgrade of the bank’s Individual rating.” KKB’s Basel I tier I capital ratio was a reasonable 11.7% at end-2007, but was still significantly lower than some of its peers (BTA:16.9%; Alliance: 17%). Fitch estimates that, given certain simplifying assumptions (zero growth in 2008; 2008 pre-impairment profit equal to that in 2007; no capital injections or distributions in 2008), KKB could take a provision charge through its 2008 income statement equal to 7.7% of end-2007 gross loans before the Basel I tier I capital ratio falls below 10%.

KKB is one of the two largest commercial banks in Kazakhstan, with a core franchise in the large corporate segment. It has been gradually increasing the proportion of SME and retail business. The current Chairman of the Board of Directors and former CEO, Nurzhan Subkhanberdin, controls a large 40.6% minority stake. Alnair Capital Holding, a private equity fund established with the capital of a member of the Abu Dhabi royal family, recently acquired an 8.0% stake and entered into legally binding agreements to acquire an additional 17.1% stake subject to necessary regulatory approvals. The European Bank for Reconstruction and Development also has a minority 8.5% stake. Most of the remaining shares are held by portfolio investors.