Fitch downgrades Bank CenterCredit ratings and affirms ATFBank ratings

/Fitch Ratings, Moscow/London, April 11, 14, heading by KASE/ – Fitch Ratings has downgraded the Long-term Issuer Default Ratings (IDR) of Bank Centercredit (BCC) and its Russian subsidiary, Bank BCC-Moscow (BCCM), to 'B' from 'B+', and withdrawn the ratings of BCCM. Fitch has also affirmed ATF Bank at 'B-' with a Stable Outlook and Moskommertsbank (MKB), Kazkommertsbank's (KKB; B/Stable) Russian subsidiary at 'CCC'. A full list of rating actions is at the end of this document. KEY RATING DRIVERS - BCC The downgrade of BCC reflects the significant deterioration of its asset quality. The ratings also consider its moderate capitalisation, weak profitability and greater reliance on National Bank of Kazakhstan (NBK) funding following recent deposit outflows. However, the ratings are supported by the bank's reasonable coverage of currently recognised problem loans, relatively conservative management and the generally supportive growth environment. BCC's non-performing loans (NPLs; 90+ days overdue) more than doubled in 2013 and stood at 19.4% of gross loans at end-2013 compared with 9.7% at end-2012. This was partially driven by a KZT34bn write-back of fully-reserved impaired loans due to changes in NBK regulation and by migration of KZT24bn restructured loans into the non-performing category. However, around KZT40bn of new NPLs were also generated from the performing portfolio. Total reported problem loans (NPLs and exposures identified by management as restructured) increased to a high 28% of the portfolio at end-2013 from 21% at end-2012. In addition, reported restructured loans may understate BCC's asset quality problems as loans rescheduled without a reduction of 10% or more in the net present value of the exposure are not reported in this category. Fitch estimates that seven of the largest 20 exposures (9% of the total loan book, or 0.9x Fitch core capital (FCC) net of reserves) have been restructured without falling into this category for reporting purposes. Positively, impairment reserves fully covered NPLs at end-2013, and Fitch calculates that BCC could have reserved 90% of total reported problem exposures before its regulatory capital ratio would have fallen to the minimum 10%. At the same time, BCC's capitalisation is only moderate, reflected in a FCC ratio of 8.2% at end-2013, and the quality of regulatory capital is rather weak, with almost half of this accounted for by instruments other than common equity. The bank's profitability remains weak with a return on average equity of only 0.4% in 2013 (0.3% in 2012), resulting in limited internal capital generation. BCC's liquidity position suffered from KZT110bn (14% of customer funds) net deposit outflow in February 2014, but was supported by a KZT80bn facility provided by the National Bank of Kazakhstan and remains acceptable in light of modest near-term debt repayments. BCC's risk profile benefits moderately from oversight by its major shareholder, Korea's Kookmin Bank (KMB, A/Stable; 42% stake). However, Fitch does not expect KMB to provide significant financial support to BCC prior to consolidation of a controlling stake, which is reflected in the Support Rating of '5'. The assignment of a Support Rating Floor of 'No Floor' reflects Fitch's view that sovereign assistance cannot be relied upon in all circumstances, in particular if the bank requires solvency, rather than liquidity support. KMB has an option, valid until 2017, to purchase the IFC's10% stake, but in Fitch's view is unlikely to exercise this in the near term. BCC's senior unsecured debt ratings are aligned with the bank's IDRs reflecting average recovery prospects. BCC's dated and perpetual subordinated debt is rated one and two notches below the bank's VR, respectively, in line with Fitch's criteria for rating such instruments. RATING SENSITIVITIES - BCC Significant continued deterioration of asset quality putting more acute pressure on the bank's capitalisation could result in a further downgrade. Upside potential for BCC's ratings is currently limited. However, stabilisation of asset quality trends and improvements in performance and capitalisation would be credit positive. BCC's ratings could be upgraded by several notches if KMB consolidates a majority stake in the bank and affirms its strategic commitment to BCC. However, Fitch views this scenario as unlikely in the near term. KEY RATING DRIVERS - ATF ATF's ratings remain constrained by its large stock of legacy problem assets, and weak capital and performance. The ratings are supported by the bank's currently comfortable liquidity and stable funding base, and some limited progress with recoveries of problem loans. Following the acquisition by the new shareholder in May 2013, NPLs fell moderately to 44% at end-2013 from 51% at end-1H13 (but broadly in line with the 46% reported at end-2012). Restructured loans comprised a further 15% of the portfolio at end-2013, and impairment coverage of NPLs and restructured exposures combined was a moderate 58%. Management expects to recover an additional KZT60bn of NPLs (equal to 7% of the gross loan book) in 2014, which will be moderately credit positive if accomplished, but unlikely to result in significant provision reversals. ATF's capital has been undermined by losses over the past five years. The FCC ratio was a moderate 11.3% at end-2013, and unreserved NPLs and restructured loans combined were equal to 2.8x FCC. At 1 March 2014, the regulatory total capital ratio stood at 12.6%, meaning the bank could have increased impairment reserves to 37% of the portfolio without breaching the 10% minimum ratio. The benefits of the loan book guarantee provided by previous owner Unicredit have already been fully accounted for through recognition of a receivable (now booked off balance sheet and backed by a deposit), and so do not represent a source of upside for the capital position. ATF's profit retention was close to zero in 2013 and would have been negative without a one-off gain of KZT4.4bn from a tax reversal. Bank was nearly break- even on pre-impairment basis, net of interest income accrued but not received in cash, indicating that ATF is unlikely to restore its capital position through internal generation. ATF's deposit base has been reasonably stable following the acquisition, and the bank has benefited from sizable inflows of state/ quasi-state funding since coming under domestic ownership. Liquidity is comfortable, with liquid assets at end-1Q14 covering 20% of customer funding following repayment of a USD311m Eurobond and KZT11bn subordinated bonds in February 2014. The bank has no material repayments scheduled for the rest of the year. The rating of ATF's senior debt is equalised with the bank's Long-term IDR. Subordinated debt issues and perpetual debt are notched off ATF's VR by one and two notches, respectively. RATING SENSITIVITIES - ATF Renewed weakening of asset quality and/or deterioration of performance, resulting in downward pressure on capitalisation, could result in a downgrade. Any indication by the NBK that it may intervene to restore the bank's solvency (not expected by Fitch at present) could also result in a downgrade. An upgrade of ATF's ratings would require significant improvement of asset quality metrics and/or a recapitalisation of the bank. KEY RATING DRIVERS - MKB MKB's Long-term IDR of 'CCC' is driven by the bank's intrinsic creditworthiness, in particular its weak asset quality and capitalisation. Fitch views capital support from MKB's ultimate 100% shareholder, KKB as unreliable and thus does not factor it into the bank's ratings. KKB has not provided capital to MKB in the recent past and has no plans to do so in the future, despite MKB's weak asset quality and capital position. KKB's funding of its subsidiary is expensive, and liquidity support is moderately constrained by the Kazakh regulatory limit of 10% of the parent's regulatory capital. Fitch classifies MKB as a subsidiary of 'limited importance' to KKB, and it does not qualify as a 'material subsidiary', i.e. would not trigger cross default clauses, under the terms of KKB's Eurobonds. MKB's problem loans (NPLs and restructured) increased to 55% of the book at end-2013 from 44% at end-2012, mostly due to an increase in restructured exposures and shrinkage of the loan book. Statutory reserves covered a moderate 22% of the loan book, and the bank's rather tight regulatory capitalisation (12.2%) allowed it to reserve only a low additional 4% of gross loans. MKB's bottom line turned marginally positive in 2013, underpinned by RUB156m income from the sale of foreclosed collateral. However, operating profit was still weak, driven by lumpy impairment charges, high operating costs and a relatively narrow net interest margin (a function of weak asset quality). Liquidity is currently satisfactory, with liquid assets covering 23% of deposits at end-2013. RATING SENSITIVITIES - MKB Increased pressure on MKB's capital, for example in case of a further weakening of its asset quality, and/or regulatory sanctions would be credit negative. Sufficient recapitalisation of the bank could lead to an upgrade, but this is not currently expected by Fitch. KEY RATING DRIVERS - BCCM BCCM's IDRs are equalised with those of BCC, given the stable support track record, significant management and operational integration of the two banks and the small size of the subsidiary (around 2.6% of the parent's total assets as of end-2013), resulting in a manageable cost of potential support. The 'b-' VR reflects BCCM's weak performance, deterioration of asset quality, tight liquidity and limited franchise, but also takes into account the bank's sound loss absorption capacity and solid reserves created against non-performing loans. Fitch has withdrawn the ratings as BCCM has chosen to stop participating in the rating process. Accordingly, Fitch will no longer provide ratings or analytical coverage for BCCM. The ratings actions are as follows: BCC Long-term foreign and local currency IDRs: downgraded to 'B' from 'B+', Outlook Stable Short-term foreign currency IDR: affirmed at 'B' National Long-term Rating: downgraded to 'BB+(kaz)' from 'BBB(kaz)', Outlook Stable Viability Rating: downgraded to 'b' from 'b+' Support Rating: affirmed at '5' Support Rating Floor: assigned at 'No Floor' Senior unsecured debt downgraded to 'B' from 'B+'; Recovery Rating 'RR4' National senior unsecured debt rating downgraded to 'BB+(kaz)' from 'BBB(kaz)' Dated subordinated debt downgraded to 'B-' from 'B'; Recovery Rating 'RR5' National dated subordinated debt rating downgraded to 'BB-(kaz)' from 'BB+(kaz)' Perpetual subordinated debt affirmed at 'CCC'; Recovery Rating RR6 ATF Long-term foreign and local currency IDRs: affirmed at 'B-', Outlook Stable Short-term foreign currency IDR: affirmed at 'B' National Long-term Rating: affirmed at 'BB-(kaz)', Outlook Stable Viability Rating: affirmed at 'b-' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior unsecured debt: affirmed at 'B-', Recovery Rating 'RR4' National senior unsecured debt rating: affirmed at 'BB-(kaz)' Subordinated debt: affirmed at 'CCC', Recovery Rating 'RR5' National subordinated debt rating: affirmed at 'B(kaz)' Perpetual subordinated notes: affirmed at 'CC', Recovery Rating 'RR6' MKB Long-term foreign currency IDR: affirmed at 'CCC' Short-term foreign currency IDR: affirmed at 'C' National Long-term rating: affirmed at 'B(rus)' Viability Rating: affirmed at 'ccc' Support Rating: affirmed at '5' BCCM Long-term foreign and local currency IDRs: downgraded to 'B' from 'B+', Outlook Stable, and withdrawn Short-term foreign currency IDR: affirmed at 'B' and withdrawn Viability Rating: affirmed at 'b-' and withdrawn National Long-Term Rating: downgraded to 'BBB+(rus)' from 'A-(rus)', Outlook Stable, and withdrawn Support Rating: affirmed at '4' and withdrawn Contact: Primary Analyst (BCC, ATF, MKB) Aslan Tavitov Associate Director +7 495 956 7065 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Primary Analyst (BCCM) Konstantin Yakimovich Associate Director +7 495 956 9978 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst (ATF) Roman Kornev Director +7 495 956 7016 Secondary Analyst (BCK) Konstantin Yakimovich Associate Director +7 495 956 9978 Secondary Analyst (MKB) Maria Kuraeva Analyst +7 495 956 5575 Secondary Analyst (BCCM) Alyona Plakhova Analyst +7 495 956 2409 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media Relations: Julia Belskaya von Tell, Moscow, tel.: + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2014-04-15]