Fitch upgrades BTA Bank ratings and affirms Kazkommertsbank ratings
19.08.14 11:27
/Fitch Ratings, Moscow/London, August 15, 14, heading by KASE/ – Fitch Ratings
has upgraded Kazakhstan-based BTA Bank's Long-term Issuer Default Ratings (IDRs)
to 'B-' from 'CCC' and maintained them on Rating Watch Positive (RWP). The
agency has also affirmed Kazkommertsbank's (KKB) Long-term IDRs at 'B' with a
Stable Outlook. A full list of rating actions is at the end of this rating
action commentary.
KEY RATING DRIVERS - BTA'S IDRS
The upgrade of BTA's Long-term IDRs to 'B-' from 'CCC' reflects Fitch's opinion
of the moderately improved support prospects for BTA as a result of KKB's
acquisition of a 46.5% stake in the bank's ordinary share capital in July 2014
from the National Welfare Fund Samruk Kazyna (SK), and its receipt from SK of a
further 4.5% of BTA's shares under a trust management agreement, giving KKB
operational control over BTA. As part of the divestment, SK also sold another
46.5% equity stake in BTA to a private investor.
In Fitch's view, KKB is likely to have a high propensity to support BTA, if
needed, given plans to integrate the two banks and our expectation that BTA
will be consolidated in KKB's IFRS accounts and qualify as a material
subsidiary under the cross-default clauses in KKB's Eurobonds. The one-notch
difference between KKB's and BTA's ratings reflect BTA's still weak balance
sheet and its large size, relative to KKB, which may in certain circumstances
constrain the propensity and ability of KKB to provide support.
KEY RATING DRIVERS AND SENSITIVITIES - BTA'S VIABILITY RATING
The affirmation of BTA's Viability Rating (VR) at 'ccc' reflects the limited
recent changes in the bank's standalone credit profile, which remains
constrained by weak asset quality, capitalisation and performance. Upside
potential for the rating is limited given the deep-seated nature of the bank's
problems.
BTA continues to be burdened by its extremely high volume of non-performing
loan (NPLs; 88% of gross loans at end-1Q14), significant unreserved problem
loans and illiquid legacy investments in equity securities (23% of Fitch core
capital (FCC) at end-1Q14). We estimate BTA's NPLs, net of specific IFRS
reserves, at a high 88% of FCC.
Despite the relatively high 25% FCC/risk-weighted assets ratio at end-1Q14,
capitalisation is weakened by the fact that 60% of FCC relates to the fair-value
adjustments (reductions) to BTA's low-rate liabilities, which will have to be
accrued back through the income statement. Pre-impairment profit (net of
interest revenues accrued but not received in cash) turned moderately positive
in 2013, but internal capital generation is still weak.
BTA's liquidity risks are currently limited in view of its considerable
liquid-asset cushion, amounting to 61% of its customer deposits or 18% of
liabilities at end- 1Q14, its granular third-party deposit base and the limited
near-term Eurobond maturities.
KEY RATING DRIVERS - KKB's IDRS AND VIABILITY RATING
KKB's ratings reflect the bank's weak asset quality and the potential need for
further provisioning of its problem loans. However, the ratings also consider
KKB's positive pre-impairment profit (net of accrued interest), moderate
refinancing and liquidity risks, and the track record of significant debt
repayments in a challenging environment.
In Fitch's view, risks and uncertainties relating to the BTA acquisition, and
the reduction in capital ratios resulting from an ongoing share buyback, are
both moderately negative for KKB's credit profile. However, these risks are
consistent with the bank's ratings.
KKB's high 31% NPL ratio at end-1Q14 and its sizeable exposure to weakly
performing real-estate loans (53% of gross loans), a significant portion of
which relates to land investments are credit negative. KKB's loan book could
require further provisioning given the still moderate (58%) specific IFRS
reserve of NPLs (total reserve coverage of NPLs was 111%) and the fact that
only a moderate portion of the real estate loans are currently reported as
NPLs.
Net NPLs (NPLs less specific IFRS reserves for NPLs) were a high 1.2x FCC at
end-1Q14, and Fitch estimates this ratio may rise to 1.8x following the
consolidation of BTA. Total problem loans at KKB (NPLs and restructured loans)
net of total reserves stood at 90% of FCC. Potential benefits from loan
purchases by the government Problem Loan Fund, or co-ordinated work-out of
KKB's and BTA's largest (sometimes overlapping) exposures, are highly uncertain
at present.
Fitch estimates that KKB's FCC/risk-weighted assets ratio may fall to about 10%
following the consolidation of BTA, from 14.5% at end-1Q14, as a result of (i)
the BTA acquisition; (ii) a buyback of 17.4% of the bank's share capital in
August 2014, mainly from SK; and (iii) adjustments to the book values of some of
BTA's assets and liabilities. This would represent a significant reduction in the
bank's loss absorption capacity, but would still be consistent with KKB's 'B'
rating, in Fitch's view. Furthermore, there is still significant uncertainty
regarding the ultimate impact of the BTA acquisition on KKB's capitalisation,
and the scope (and timing) of any further provisioning requirements on the two
banks' loan books.
KKB's liquidity is comfortable due to the bank's solid deposit collection
capabilities, potential access to government funding programmes and limited near
to medium-term wholesale debt repayments. Liquidity management might be
somewhat complicated in light of the high proportion of SK deposits in the
funding structure. However, Fitch expects these deposits to be reasonably
stable.
KKB's performance weakened significantly in 1Q14, mainly as a result of trading
losses on the back of KZT devaluation. However, Fitch views the bank's 2013 pre-
impairment profit (net of accrued interest and fair value adjustment in 4Q13,
equal to 2% of average net loans) as a more meaningful indicator of the bank's
ability to absorb losses through the income statement. Pre-impairment profit in
absolute terms should increase slightly following the BTA consolidation, given
the latter's moderately positive result and potential for some moderate cost
synergies.
RATING SENSITIVITIES - KKB's and BTA's IDRS
KKB's VR, IDRs, and debt ratings could be downgraded if the bank's solvency
deteriorates significantly more than Fitch currently anticipates as a result of
greater than expected losses on its own or BTA's problem assets. Successful
workouts of problem loans, resulting in a strengthening of the capital position,
could result in upward pressure on the ratings.
The RWP on BTA's Long-term IDRs and senior debt rating reflects the potential
for these ratings to be upgraded to 'B' as a result of closer integration
between KKB and BTA.
KEY RATING DRIVERS AND SENSITIVITIES - KKB'S SUPPORT RATING; KKB's
and BTA's SUPPORT RATING FLOORS
KKB's '5' Support Rating and 'B-' Support Rating Floor (SRF) reflect Fitch's
view of the limited probability of support from the Kazakh authorities given
recent defaults of other large Kazakh banks. In light of the weak track record of
support, there is limited upside for these ratings. BTA's Support Rating '5'
has been placed on RWP to reflect the potential for closer integration between
KKB and BTA. In line with its criteria, Fitch has withdrawn BTA's SRF as it now
views institutional (shareholder) support as the more likely source of external
support for the bank.
KEY RATING DRIVERS AND SENSITIVITIES - DEBT RATINGS
The ratings of both banks' senior unsecured debt issues are equalised with their
respective Long-term IDRs and would likely change in tandem with these ratings.
KKB's subordinated debt and perpetual debt issues are notched off the bank's VR
by one and two notches, respectively. The two-notch differential on the
perpetual debt reflects its deep subordination and the possibility of coupon
omissions.
The rating actions are as follows:
Kazkommertsbank:
Long-term foreign and local currency IDRs affirmed at 'B'; Outlook Stable
Short-term foreign and local currency IDRs affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'B-'
Long-term senior unsecured debt rating affirmed at 'B'; Recovery Rating 'RR4'
Short-term senior unsecured debt rating affirmed at 'B'
Subordinated debt rating affirmed at 'B-'; Recovery Rating 'RR5'
Kazkommerts International BV:
Senior unsecured debt rating affirmed at 'B'; Recovery Rating 'RR4'
KAZKOMMERTS FINANCE BV:
Perpetual debt rating affirmed at 'CCC'; Recovery Rating 'RR6'
BTA:
Long-term foreign and local currency IDRs upgraded to 'B-' from 'CCC',
maintained on RWP
Short-term foreign and local currency IDRs upgraded to 'B' from 'C', removed
from RWP
Viability Rating affirmed at 'ccc', removed from RWP
Support Rating '5', placed on RWP
Support Rating Floor affirmed at 'No Floor' and withdrawn
Senior unsecured debt upgraded to 'B-' from 'CCC', maintained on RWP,
Recovery Rating 'RR4'.
Contacts:
Primary Analyst
Roman Kornev
Director
+7 495 956 7016
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054
Secondary Analyst
Konstantin Yakimovich
Associate Director
+7 495 956 9978
Committee Chairperson
James Watson
Managing Director
+7 495 956 6657
Media relations:
Julia Belskaya von Tell, Moscow,
tel. + 7 495 956 9908/9901,
julia.belskayavontell@fitchratings.com
[2014-08-19]