Moody's affirms Kazkommertsbank (Kazakhstan) ratings

/Moody's Investors Service, London, February 28, 14, heading by KASE/ – Moody's Investors Service has today affirmed the following ratings of Kazkommertsbank: - Long-term local- and foreign-currency deposit ratings of B2; - Not Prime short-term local- and foreign-currency deposit ratings; - Foreign-currency senior unsecured debt rating of Caa1; - Foreign-currency subordinated debt rating to Caa2; - Foreign-currency junior subordinated debt rating of Caa3 (hyb); and - Standalone bank financial strength rating (BFSR) of E, equivalent to a baseline credit assessment (BCA) of caa1. RATINGS RATIONALE Today's action reflects Moody's assessment of the impact of Kazkommertsbank's pending acquisition of shares in BTA Bank (deposits B3 positive, BFSR E stable / BCA caa2). The rating agency considers that, on balance, the transaction will have a neutral effect on Kazkommertsbank's credit profile. On 21 February 2014, Kazkommertsbank's shareholders approved the acquisition of a stake in BTA Bank following the preliminary agreement signed in December 2013 between Kazakhstan's national welfare fund JSC "Samruk-Kazyna" (i.e., BTA Bank's controlling shareholder) and a consortium of investors – consisting of Kazkommertsbank and Kazakh businessman Mr. Kenes Rakishev. According to the final terms of the agreement, Kazkommertsbank and Mr. Rakishev are acquiring equal stakes of 46.5% in the capital of BTA, while Samruk-Kazyna retains a minority 4.26% stake in the lender, which will be transferred to Kazkommertsbank under a trust agreement. As a result, Kazkommertsbank will take control over BTA Bank, with further plans to merge the two banks. The acquisition of BTA Bank's shares still requires regulatory and anti-monopoly approvals. The affirmation of Kazkommertsbank's ratings with a stable outlook is driven by the following considerations: 1) Kazkommertsbank's own capital adequacy is modest and may experience downside pressure from ongoing loan loss charges and weak earnings, driven by shrinking margins and low business volumes. However, Moody's expects that the consolidation of BTA Bank will be supportive for Kazkommertsbank's capital adequacy – as of end-Q3 2013, BTA Bank reported an equity-to-assets ratio of 18.2% vs. Kazkommertsbank's 12.6%. 2) Kazkommertsbank's profitability is also modest and is constrained by limited lending growth and still considerable loan loss provisions. In light of BTA Bank's weaker revenue-generating capacity and likely rising operating costs caused by the integration of the two banks, the rating agency expects that the consolidation of BTA Bank will have a negative effect on Kazkommertsbank's profitability at least in the next 12 to 18 months. However, in the longer term Kazkommertsbank will likely benefit from the cost optimisation when the two banks' integration is successfully completed. 3) Moody's estimates that Kazkommertsbank's total problem loans (non-performing and restructured loans) accounted for about 50% the bank's gross loans at end-H1 2013. Loan loss reserves amounted to 33.1% of the gross loans at the same date. According to the bank's IFRS report 48% of Kazkommertsbank's loans were denominated in foreign currency as of year-end 2012. The devaluation of Kazakh tenge in February 2014 will weaken the debt-servicing capacity of many of the borrowers and result in a rise in problem loans. Consequently, Moody's believes that Kazkommertsbank will need to significantly increase its loan loss reserves as it assesses the negative impact of the devaluation. BTA Bank's consolidation will also lead to a rise in Kazkommertsbank's problem loans ratio. However, BTA Bank's high level of problem loans (87% of gross loans based Moody's estimate) is adequately covered by loan loss reserves (74.8% of gross loans) as of end-Q3 2013. Therefore, the acquisition of BTA Bank is unlikely to materially increase Kazkommertsbank's loan loss provisions. 4) Kazkommertsbank's liquid assets accounted for 19.6% of its total assets at end-Q3 2013. The rating agency notes that neither Kazkommertsbank nor BTA Bank have large short-term market debt repayments. Given Kazkommertsbank's high funding concentration (top 10 customers accounted for 50% of the total customer funds at end-Q3 2013) the current level of liquidity cushion may need further enhancement to cope with potential deposits outflows. MOODY'S SUPPORT ASSUMPTIONS Kazkommertsbank's ratings also reflect its status as Kazakhstan's largest bank. Moody's incorporates moderate systemic support probability in the bank's B2 deposit ratings, which provides two notches of uplift from its caa1 BCA. However, the rating agency does not assume any systemic support in Kazkommertsbank's debt ratings, which reflects the Kazakh government's track record of not providing support to debt holders of systemically important banks in rescue programmes. WHAT COULD MOVE THE RATINGS UP/DOWN Upward pressure could be exerted on Kazkommertsbank's ratings as a result of any significant improvement in its asset quality and profitability. Kazkommertsbank's rating may be downgraded if its asset quality deterioration has a material adverse effect on its profitability and capital adequacy. Any material weakening in the liquidity profile could also have negative rating implications. The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology. Headquartered in Almaty, Kazakhstan, Kazkommertsbank reported total assets of $17.15 billion, shareholders' equity of $2.15 billion, and net income of $151 million as of end-Q3 2013, according to the bank's unaudited IFRS financial statements. REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. [2014-03-03]