Fitch upgrades AsiaCredit Bank ratings, affirms Subsidiary Bank Alfa-Bank ratings
18.04.14 12:23
/Fitch Ratings, Moscow, April 16, 2014, heading by KASE/ – Fitch Ratings has
upgraded AsiaCredit Bank JSC's (ACB) Long-term Issuer Default Ratings (IDRs) to
'B' from 'B-' with a Stable Outlook and affirmed JSC SB Alfa Bank Kazakhstan's
(ABK) Long-term IDRs at 'B+' with a Stable Outlook. A full list of rating
actions is available at the end of this commentary.
KEY RATING DRIVERS - ACB
The upgrade of ACB reflects considerable equity contributions by the bank's
major shareholder in 2013 preserving ACB's solid capitalisation, as well as an
expectation of further capital injections in line with the bank's rapid growth
strategy. The upgrade also reflects management's ability to find new borrowers,
while maintaining reasonable asset quality. At the same time ACB's ratings also
factor in its currently small franchise, high concentrations on both sides of
the balance sheet with significant reliance on deposits of state-owned entities,
and only moderate profitability.
ACB's shareholder contributed KZT8bn of new equity during 2013, which allowed
the bank to sustain a sound 23% Fitch Core Capital (FCC) ratio at end-2013 (29%
at end-2012) despite a rapid 91% loan growth. Due to ACB's moderate internal
capital generation (return on average equity of only 8% in 2013) further equity
contributions will be required to achieve a planned annual loan growth of 30%-
80% in the medium term. According to management, the shareholder is ready to
provide KZT17bn of equity in 2014-2017, of which KZT8bn are expected in 2014.
ACB's reported assets quality is reasonable with non-performing loans (NPLs,
over 90 days overdue) at 4.1% of gross loans at end-2013 and a further 1.3% of
restructured exposures. The latter number may be somewhat understated, as
among the top 25 loans (comprised 51% of the loan book at end-2013) there is
one exposure equal to 2.7% of loans, which in Fitch's view could be
restructured. The bank has also reported a consistently elevated share of
one-day overdue loans (18.7% at end-2M14) in its regulatory accounts, which is
explained by management as being due to technical delays, but in Fitch's view
this shows that asset quality is potentially vulnerable. ACB is also over
reliant on collateral reflected in a low coverage of NPLs by reserves of only
37%. Positively, ACB's current capital buffer could allow it to fully reserve
up to 18.8% of its loans and still comply with regulatory capital requirements.
ACB mainly relies on corporate customer funding (57% of end-2013 liabilities),
but has gradually been diversifying its liability structure through attracting
retail deposits (15%) and issuance of local bonds (21%). At least 49% of total
customer funding (35% of total liabilities) was sourced from state bodies,
which, although representing considerable concentration risk, tends to be
stable.
ACB maintains reasonable liquidity cushion sufficient to cover about 20% of
customer accounts at end-2M14. Wholesale debt repayments are limited in the
medium term (KZT4.4bn in 2014, KZT2.5bn in 2015). The biggest risk to liquidity
is the sudden outflows of largest depositors, which is not Fitch's central
scenario.
The Support Rating '5' reflects Fitch's view that support from the bank's
private shareholder, although possible, cannot be relied upon. Support Rating
Floor of 'No Floor' is based on ACB's low systemic importance.
ACB's senior unsecured local debt ratings are aligned with the bank's Long-term
Local Currency IDR and National Long-term rating.
RATING SENSITIVITIES - ACB
Upside potential for ACB's ratings is currently limited. However, further growth
of the franchise supported by capital injections, while maintaining reasonable
asset quality and performance would be positive for the credit profile. Lack of
or delays in provision of fresh capital that would result in material weakening
of ACB's loss-absorption capacity, significant deterioration of asset quality
and/or sharp funding outflows putting pressure on liquidity would result in a
downgrade.
KEY RATING DRIVERS - ABK
ABK's Long-term IDRs and National Rating are based on the bank's individual
strength, which in turn is reflected in its Viability Rating (VR) of 'b+'. The
VR reflects the bank's small franchise, continuing rapid growth and high
single-name concentrations on both sides of the balance sheet. At the same
time, the VR positively considers its strong reported asset quality and solid
capital adequacy, reasonable liquidity and sound operating performance helped
by low average funding costs.
Asset quality is strong. NPLs and restructured loans were, respectively, modest
at 1.2 and 2% of gross loans at end-2013 and were adequately covered by
reserves of 3.6%. Although rapid 42% loan growth in 2013 means loans are
unseasoned, a detailed review of the top 20 borrowers (52% of gross loans)
confirmed that most exposures are of reasonable quality. However, some of the
bigger exposures (12% of gross loans) are less sound either financially or in
terms of collateral quality, while retail loans (7%) are also potentially
vulnerable.
Credit risks are mitigated by robust pre-impairment profitability, which equals
about 5% of average loans, and solid capitalisation with FCC and regulatory
total capital ratio of 18.5% and 21%, respectively, at end-2013. Regulatory
capital would allow ABK to increase its loan impairment reserves to 12% of
gross loans from 4%, before reaching minimum regulatory capital ratios.
Capitalisation is likely to remain comfortable in 2014; however, if growth
outpaces earnings generation (return on equity of 20% in FY13) the bank is
likely to receive its pre-approved USD40m equity injection from Alfa Group.
Liquidity is adequate. ABK relies on short-term funding from local corporates
(69% of total funding at end-2013), approximately half of which was accounted
by 20 depositors. Withdrawal risk is mitigated by a KZT46bn liquidity buffer
consisting of cash and unencumbered securities, which equalled 28% of customer
funding. Scheduled debt repayments are a moderate KZT7bn in 2014. As a further
mitigant ABK has an unutilised KZT9bn limit (6% of liabilities) from its 100%
shareholder OJSC Alfa Bank (ABR; BBB-/Negative/bbb-).
The Support Rating of '4' reflects Fitch's view of the limited probability of
support that might be forthcoming from ABR, if needed. In Fitch's view, support
may be forthcoming in light of the common branding of ABK and other group
entities, potential reputational risk of any default at ABK and the small cost
of any support that may be required.
At the same time, Fitch views ABR's propensity to provide support as limited
because (i) it holds shares in ABK on behalf of ABH Holdings S.A.(ABHH) to
which it has ceded control and voting rights through a call option under which
ABHH may acquire the shares in ABK until end-June 2014 (this agreement likely
to be extended); (ii) limited operational integration between ABK and ABR; and
(iii) ABR's tight regulatory capital preventing it from providing capital to the
subsidiary.
Support from other Alfa Group entities, in Fitch's view, also cannot always be
relied on due to ABK's small size and as a result that support could be withheld
under certain circumstances, especially in a systemic financial crisis in
Kazakhstan. Fitch notes ABHH's failure to provide full support to its Ukraine-
based subsidiary PJSC Alfa-Bank (ABU; CCC) in 2008. The agency, however
believes there is a lower probability of Alfa Group not supporting ABK, relative
to ABU. This is reflected in ABK's higher Support Rating '4' than ABU's '5'.
ABK's senior unsecured local debt ratings are aligned with the bank's Long-term
Local Currency IDR and National Long-term rating.
RATING SENSITIVITIES - ABK
An upgrade of Long-term IDRs, VR, National Rating and debt ratings would result
from a strengthening of the franchise and an extended track record of good
performance and asset quality. The ratings could be downgraded following a
material deterioration in capitalisation or asset quality.
The Support Rating could be downgraded if ABK does not receive timely support
when needed. Potential for an upgrade of the Support Rating is limited.
The rating actions are as follows:
ACB
Long-term foreign currency IDR: upgraded to 'B' from 'B-'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: upgraded to 'B' from 'B-'; Outlook Stable
National long-term rating: assigned at 'BB(kaz)'; Outlook Stable
Viability Rating: upgraded to 'b' from 'b-'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: assigned at 'B', Recovery Rating 'RR4'
National senior unsecured debt rating: assigned at 'BB(kaz)'
ABK
Long-term foreign-currency Issuer Default Rating (IDR) affirmed at 'B+'; Outlook
Stable
Short-term foreign-currency IDR affirmed at 'B'
Long-term local-currency IDR affirmed at 'B+'; Outlook Stable
National long-term rating affirmed at 'BBB(kaz)'; Outlook Stable
Viability Rating affirmed at 'b+'
Support Rating affirmed at '4'
Senior unsecured debt: affirmed at 'B+', Recovery Rating 'RR4'
National senior unsecured debt rating: affirmed at 'BBB(kaz)'
Contacts:
Primary Analysts
Roman Kornev (ACB)
Director
+7 495 956 7016
Fitch Ratings CIS Limited
26 Valovaya Street
Moscow 115054
Aslan Tavitov (ABK)
Associate Director
+7 495 956 7065
Secondary Analysts
Konstantin Yakimovich (ACB, ABK)
Associate Director
+7 495 956 9978
Committee Chairperson
Alexander Danilov
Senior Director
+7 495 956 6657
Media Relations:
Julia Belskaya von Tell, Moscow,
tel. + 7 495 956 9908/9901,
julia.belskayavontell@fitchratings.com
[2014-04-18]