Fitch downgrades 3 Kazakhstani Banks, Astana Finance and Subsidiaries

    Fitch Ratings-London/Moscow-6 May 2009: Fitch Ratings has today downgraded three Kazakh banks - Halyk Bank (Halyk), Kazkommertsbank (KKB) and Bank CenterCredit (BCC) - and non-bank lender Astana Finance (AF) on support and asset quality concerns. Halyk has been downgraded to Long-term Issuer Default (IDR) ‘B+’ from ‘BB-’, KKB to ‘B-’ from ‘BB-’, BCC to ‘B’ from ‘B+’ and AF to ‘CCC’ from ‘B+’.
    The agency has also downgraded Moskommertsbank, the Russian subsidiary of KKB, to ‘CCC’ from ‘B-’, and Astana Finance Leasing (AFL), a subsidiary of AF, to ‘CCC’ from ‘B+’. A full list of rating actions is provided at the end of this commentary.
    The downgrades reflect a combination of support and asset quality concerns. Fitch has revised downwards its expectations of government support for the country’s leading financial institutions following the defaults of BTA Bank (‘RD’ (Restricted Default)) and Alliance Bank JSC (‘RD’) and the agency’s understanding that there is now a limited willingness on the part of the Kazakh authorities to provide further capital support to the banking sector.
    In Fitch’s view, the Kazakh authorities might consider moderate further capital injections, beyond those already announced, for the country’s leading banks, but substantial contributions are now unlikely to be forthcoming.
    At the same time, Fitch’s concerns about banks’ potential capital requirements have increased following further sharp deterioration in reported asset quality in Q109 and reviews of individual banks’ loan books during recent meetings.
    In the agency’s view, reported asset quality metrics are likely to continue to worsen in the next few months as the extent of underlying problems in banks’ loan books becomes more apparent, portfolios continue to season and the impact of the February 2009 tenge devaluation continues to feed through into loan performance.
    Halyk’s reported asset quality has deteriorated sharply, with loans overdue by 90 days according to local regulatory data up to 8.7% at end-Q109 from 6.4% at end-2008, and those overdue by one day increasing to a high 22% from 13.1%.
    The regulatory total capital ratio of 11.3% at end-Q109 (pro forma 13.1% allowing for the expected KZT 33bn preference share issue) and reserves/gross loans ratio of 14.4% provide only limited loss absorption capacity, given asset quality trends. Relative to KKB, Halyk’s credit profile is supported by its somewhat less high risk loan book, the much lower proportion of foreign funding (reducing the potential attractiveness of debt restructuring), the bank’s smaller size (reducing the potential cost of government support) and the close relationship between the ultimate majority shareholders (the President’s daughter and son-in-law) and the Kazakh authorities.
    However, if asset quality continues to deteriorate without further new capital injections (beyond the planned KZT 33 billion) coming in, Halyk will likely be downgraded further, a risk reflected in the Negative Outlook on the bank.
    The recent worsening in reported asset quality numbers at KKB has not been as sharp as at some peers (90 day over-dues reported to the local regulator up to 6.3% from 5.4% during Q109; one day over-dues up to 16% from 11.5%).
    However, in Fitch’s view these numbers severely underestimate the scope of asset quality problems at the bank, with a significant part of the portfolio already restructured and the majority of the bank’s largest loans showing clear signs of impairment.
    The regulatory capital ratio of 12.1% at end-Q109 (13.2% pro forma allowing for the expected KZT 36 billion equity injection) and reserves/loans ratio of 19.8% provide inadequate loss absorption capacity, in the agency’s view, given the scope of asset quality problems, and significant recapitalization is likely to be needed.
    The very high proportion of foreign funding is a further weakness, and restructuring of this could ultimately be seen by the Kazakh authorities as the preferred way to support the capital position of the bank should its credit profile continue to weaken. The Negative Outlook reflects the potential for further asset quality deterioration, which could lead to the bank’s recapitalization needs crystallizing in the forthcoming months.
    Although BCC’s reported loan impairment has increased (90 day over-dues reported to the local regulator up to 4.4% from 2.5% in Q109; one day over-dues up to 12.2% from 7.7%), asset quality remains less bad than at peers.
    Loss absorption capacity is also reasonable, with the end-Q109 regulatory capital ratio standing at 18.3% and reserves/loans ratio 10.2%, and, as at Halyk, the proportion of foreign funding is more moderate than at peers.
    The Evolving Outlook reflects the potential for BCC to be downgraded further, should asset quality continue to deteriorate without minority shareholder Kookmin Bank (‘A+’/Negative Outlook) completing its takeover of the bank.
    However, the Outlook also takes into account the potential for a multi-notch upgrade of BCC should Kookmin ultimately increase its ownership from the current 30% to a majority stake and become a strategic shareholder of the bank.
    The downgrade and RWN on AF reflect increased uncertainty about the readiness of the Kazakh authorities to support the company, and the risk that deterioration in the company’s credit profile could result in it needing to restructure its liabilities.
    AF’s credit profile is undermined by its weak capital and liquidity positions, deteriorating asset quality, high individual borrower concentrations and exposure to the construction/real estate sector and high dependence on foreign wholesale funding.
    Credit updates on Halyk, KKB, BCC and AF will be published shortly on