S&P downgrades AsiaCredit Bank (Kazakhstan) ratings, Outlook "Stable"

/Standard & Poor's, Frankfurt, June 11, 13, Standard & Poor's English translation, KASE headline/ – Standard & Poor's Ratings Services said today it had lowered its long- and short-term counterparty credit ratings on Kazakhstan-based JSC AsiaCredit Bank to 'B-/C' from 'B/B'. The outlook is stable. At the same time, we lowered our Kazakhstan national scale rating on the bank to 'kzBB-' from 'kzBB+'. The rating actions reflect our view that AsiaCredit Bank's capital position is weakening. This resulted from rapid loan growth over the past two years that was not sufficiently supported by shareholder capital injections, while earnings generation remained low. The postponement of a planned capital infusion in 2012 caused our risk-adjusted capital (RAC) ratio for AsiaCredit Bank to decline by more than we had anticipated. Consequently, we have revised our assessment of the bank's capital and earnings to adequate from strong. We now forecast the RAC ratio (before adjustments for diversification) to decrease to 9.5%-10.0% over the next 12-18 months. This forecast is based on our assumption of loan growth of about 120% in 2013 and 45% in 2014, and fresh capital of Kazakhstani tenge (KZT) 3 billion (about $20 million) in the first half of 2013, KZT5 billion in October 2013, and KZT5 billion in 2014. However, because the majority shareholder has already postponed a capital injection, we are uncertain whether the planned injections would take place in the given time frame. If AsiaCredit Bank does not receive the planned KZT8 billion in additional capital this year, the RAC ratio could weaken further. If the bank's future capital policy, philosophy, and growth rates were to differ from our current assumptions we could reassess our view of the bank's solvency. AsiaCredit Bank's earnings capacity remains moderate, in our view. We expect the bank's net interest margins to remain depressed, due to the rising cost of attracting new customers, general market trends, onerous operating expenses because of high investments in franchise growth, and increasing provisions for the rapidly expanding credit portfolio. In our opinion, the bank is underprovisioned. The ratio of loan loss reserves to total loans was 1.7% at year-end 2012, according to International Financial Reporting Standards. This is insufficient to cover loans more than 90 days overdue (5.2% of total loans on Feb. 1, 2013) and restructured loans (about 5%). We consider that the bank would have to create significantly more provisions in 2013-2014, which would hamper its profitability and capacity to build up capital. Furthermore, in our view AsiaCredit Bank's concentrated corporate depositor base leaves it exposed to potential large deposit outflows. This is although we acknowledge that AsiaCredit Bank's funding position differs little from that of other small to midsize Kazakh banks. We believe attracting retail deposits would entail a significant amount of investments in the distribution network and an increase in the cost of funding. The ratings reflect our 'bb-' anchor for banks operating primarily in Kazakhstan, as well as AsiaCredit Bank's weak business position, adequate capital and earnings, moderate risk position, average funding, and adequate liquidity, as our criteria define these terms. The stand-alone credit profile is 'b-'. The stable outlook on AsiaCredit Bank reflects our expectation that the bank will maintain adequate capitalization and liquidity during the rapid growth of its franchise over the next 12-24 months, while continuing to expand and diversify its depositor base. We anticipate an increase in nonperforming loans over the next two years as the loan portfolio matures. We could consider a negative rating action if the bank's asset quality deteriorated more significantly and faster than we currently expect, leading us to revise our assessment of its risk position to weak. It could also be triggered if the bank experienced a liquidity shortage, for example, due to the exit of large depositors. We might take a positive rating action if shareholder capital increases substantially improved the bank's capacity to absorb losses, given its envisioned rapid loan growth. This improvement would be reflected by the bank maintaining a RAC ratio (before adjustments for diversification) comfortably exceeding 10% throughout the forecast horizon. Demonstrated ability to manage rapid growth, without significant deterioration of asset quality, and further reduction of lending and funding concentrations could lead to a more positive assessment in the longer term. Primary Credit Analyst: Annette Ess, Frankfurt, (49) 69-33-999-157; annette_ess@standardandpoors.com Secondary Contact: Natalia Yalovskaya, Moscow, (7) 495-783-4097; natalia_yalovskaya@standardandpoors.com [2013-06-12]