Fitch affirms ratings of Development Bank of Kazakhstan; outlook Stable
20.11.14 14:25
/Fitch Ratings, Moscow, November 19, 14, heading by KASE/ – Fitch Ratings has
affirmed Development Bank of Kazakhstan's (DBK) Long-term foreign and local
currency Issuer Default Ratings (IDRs) at 'BBB' and 'BBB+', respectively. The
Outlooks are Stable. A full list of rating actions is at the end of this
commentary.
KEY RATING DRIVERS - DBK
DBK's ratings reflect Fitch's view of the high probability of support being
forthcoming from the government of Kazakhstan (BBB+/A-/Stable), if needed.
This is based on (i) DBK's ultimate sovereign ownership, (ii) the bank's
important policy role, (iii) the moderate cost of any support that might be
required to DBK and (iv) potential adverse economic consequences of a failure
by the authorities to support the bank.
The one-notch differential between the sovereign and the bank's ratings reflects
(i) DBK's significant leverage, funded by wholesale debt, (ii) the somewhat
loose government supervision of the bank's operations; (iii) the parent
company's limited standalone financial resources and, hence, potential delays
in support if it is needed in a stress scenario; and (iv) the risk that the
sovereign could cease to provide full support to DBK and other quasi-sovereign
entities before defaulting on its own obligations, given the sizable debt of
quasi-sovereigns relative to that of the sovereign.
The government of Kazakhstan ultimately controls 100% of DBK's share capital
through the wholly-owned JSC National Management Holding Baiterek (BBB+/A-
/Stable). In Fitch's view, any default by DBK could have a considerable negative
impact on the national economy, potentially posing disruption risks to some of
the development projects financed by DBK and negatively affecting other quasi-
sovereign entities' access to, and cost of, foreign capital.
Fitch understands that DBK's largest projects were approved at the highest
political level as part of the national industrialisation programme (58% of
gross loans at end-3Q14). However, Fitch considers the currently limited direct
government supervision as a moderate corporate governance weakness. No
government officials sit on DBK's board of directors and only two members of the
six-member board represent the parent company. The bank is also exempt from
regulatory oversight from the National Bank of Kazakhstan (NBK).
The probability of DBK requiring support is relatively high given the bank's
reliance on non-government wholesale funding sources and its moderate
capitalisation. The cost of supporting the bank, if needed, is currently modest,
relative to sovereign financial resources, even allowing for potential
considerable growth. DBK's third-party wholesale obligations were equal to 2.1%
of GDP or 4.7% of official international reserves at end-3Q14, while 38% of the
bank's funding was guaranteed by the JSC Sovereign Wealth Fund Samruk-Kazyna
(BBB+/A-/Stable). DBK's plans to increase the proportion of local currency
borrowings in the near to medium term could also further reduce the potential
burden of any support that may be required.
The bank's capitalisation remains moderate in light of the high-risk nature of
its development projects, very high concentrations and limited internal capital
generation. The Fitch Core Capital (FCC)/ risk-weighted assets ratio of 18.5%,
Basel I Tier I and total capital ratios of 18.7% and 19.3% at end-3Q14 may
increase by about 190bp prior to end-2014 as a result of an upcoming equity
contribution by the government. However, the increase might be offset by
potential additional impairment provisions on foreign currency loans, which
comprised 80% of the portfolio at end-3Q14.
Following DBK's non-performing loan (NPL) transfers to a sister company in 2013
and 1H14, reported NPLs reduced to 6.7% of the portfolio and restructured loans
made up a further 5.3% at end-3Q14. Net of reserves, together these totalled 16%
of FCC. The bank's unguaranteed exposure to the sister company comprised a
further 10%. Fitch also believes that a loan to a metals and mining company,
reportedly performing and equal to 29% of FCC, is highly risky and may put
pressure on capitalisation.
The bank's liquidity is currently comfortable due to its limited upcoming
wholesale repayments amounting to USD500m in 4Q14-3Q15 or 10% of end-3Q14's
liabilities, with USD280m relating to its senior unsecured Eurobonds. DBK had
USD1.4bn of liquid assets at end-October 2014, comprising mainly placements
with NBK and repoable investment-grade debt securities.
RATING SENSITIVITIES - DBK
DBK's IDRs are likely to remain one notch below those of the sovereign, and to
move in tandem with them.
A marked weakening of the bank's policy role or less close association with the
Kazakh authorities could result in negative rating action, although neither
scenario is expected by Fitch. The ratings could also come under downward
pressure if leverage increases markedly and asset quality deteriorates sharply
without adequate capital support being provided.
The ratings could be upgraded and equalised with the sovereign if the latter
guarantees a large majority of DBK's funding, capitalisation strengthens
significantly potentially coupled with the government authorities' closer
involvement in the management of the bank.
The rating actions are as follows:
Local currency Long-term IDR: affirmed at BBB+/Stable
Local currency Short-term IDR: affirmed at F2
Long-Term IDR: affirmed at BBB/Stable
Short-Term IDR: affirmed at F3
Support Rating: affirmed at 2
Support Rating Floor: affirmed at BBB
Senior unsecured Long-term rating: affirmed at BBB
Short-term rating: affirmed at F3.
Contact:
Primary Analyst
Roman Kornev
Director
+7 495 956 7016
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054
Secondary Analyst
Aslan Tavitov
Associate Director
+7 495 956 7065
Committee Chairperson
Olga Ignatieva
Senior Director
+7 495 956 69096
Contacts for media in Moscow:
Kseniya Ivanova, Moscow, tel. + 7 495 956 6810/9901,
ksenia.ivanova@fitchratings.com
[2014-11-20]