Moody's affirms Kaspi Bank ratings; outlook on bank's debt ratings changed from stable to negative

/Moody's Investors Service, London, July 9, 14, heading by KASE/ – Moody's Investors Service has today affirmed Kaspi Bank JSC's B1/Not Prime deposit ratings and the E+ standalone bank financial strength rating (BFSR), equivalent to a baseline credit assessment (BCA) of b1. Moody's has also affirmed the bank's B1 senior unsecured local- and foreign-currency debt ratings, its B2 subordinated local currency debt ratings and Ba2.kz national scale rating. The outlook on Kaspi Bank's BFSR and long-term deposit ratings remains stable while the outlook on the bank's debt ratings was changed to negative from stable. RATINGS RATIONALE The affirmation of Kaspi Bank's ratings reflects its leading position in Kazakhstan's consumer lending segment and strong loss absorption cushion. As at year-end 2013, the bank's Tier 1 capital adequacy and total capital adequacy ratios stood at 13.1% and 17.3%, respectively, with coverage of non- performing loans (loans overdue by 90 days) at 111% of loan loss reserves. Moody's also notes the bank's strong profitability. Kaspi Bank reported return on average assets of 5.4% in 2013 because of the rapid expansion in high-margin consumer loans and credit cards that was aided by the highly efficient operational and distribution platform. Against this background, Kaspi Bank is comfortably positioned to withstand increasing competition as more players enter into this rapidly expanding segment. Kaspi Bank is currently Kazakhstan's largest loan originator in the segment of "high-margin/high risk" consumer loans. At the same time, Moody's notes that despite the recently introduced regulatory measures to limit Kazakhstan banks' expansion into consumer lending, household indebtedness has been rapidly increasing over recent years and will continue to build up. Moody's expects consumer loans to grow by 25% in 2014, which is considerably above the average growth in disposable income. The rating agency also expects that the one-off local currency devaluation in February 2014 will negatively weigh on households' disposable income and their ability to service debts. Moody's expects increasing provisioning needs for Kaspi Bank in the next 12 to 18 months that will exert negative pressure on the bank's profitability and might render its franchise vulnerable. These expectations are based on: (1) the above-mentioned asset quality risks; (2) the bank's loan performance in 2013 (overdue retail loans increased year-on-year to 21.0% from 17.8%); and (3) the bank's management data of the most recent retail loan performance. The change of the outlook on the bank's debt ratings to negative from stable was triggered by above-mentioned trends and by Kaspi Bank's almost total reliance on consumer lending for revenue. Kaspi Bank's previous rapid loan growth (that was predominantly funded by retail deposits) resulted in the bank's growing market share in deposits and indicates an increasing probability of systemic support for depositors, in case of need. Kaspi Bank's market share in retail deposits increased to 10.3% at year- end 2013 from 9.3% at year-end 2012 and 8.1% at year-end 2011 (source of data: National Bank of Kazakhstan). Moody's expectation of higher probability of systemic support is counterbalanced by the rating agency's assessment of the bank's asset quality risks; therefore, the outlook on Kaspi Bank's deposit ratings remains stable. Moody's asses a very low probability of support to Kazakhstan banks' bondholders from the government, as evidenced by the bail-in of a few large failed banks in the past several years when only depositors were supported. WHAT COULD CHANGE THE RATING DOWN/UP Kaspi Bank's long-term debt ratings might be downgraded as a result of accelerated deterioration in asset quality or profitability, and/or a decline of the bank's capital buffer. The bank's BFSR and deposit ratings carry stable outlook but might be downgraded in case of deterioration in the bank's standalone credit profile or a decline of the bank's systemic importance as measured by market share in deposits. Kaspi Bank's debt ratings carry negative outlook that might be revised back to stable were the bank's credit fundamental to exhibit strong resilience in the next 12 to 18 months. The upgrade of the deposit ratings will be contingent on the bank's ability to further develop its franchise and increase its market share, whilst also maintaining a healthy capital buffer and adequate risk appetite. PRINCIPAL METHODOLOGIES 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. Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings". 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. [2014-07-11]