S&P affirms credit ratings of Development Bank of Kazakhstan at "BBB/A-2", outlook negative

/Standard & Poor's, London, July 10, 15, KASE heading/ Standard & Poor's Ratings Services affirmed its 'BBB/A-2' long- and short-term foreign and local currency issuer credit ratings on the Development Bank of Kazakhstan. The outlook is negative. We also affirmed the Kazakhstan national scale rating on DBK at 'kzAA+'. The affirmation reflects our view that there is an almost certain likelihood that the government of Kazakhstan would provide timely and extraordinary support to the institution in a financial stress scenario. DBK is the largest subsidiary of the National Management Holding Baiterek and we expect it to remain core to the overall Baiterek Group's strategy, which is broadly aimed at supporting Kazakhstan's economic development and diversification. These strengths are moderated by DBK's relatively weak stand-alone credit profile (SACP) of 'b+', primarily reflecting concentrated wholesale funding, high industry concentrations in the loan book, and volatile and low core profitability. We rate DBK under our criteria, "Group Rating Methodology" and "Rating Government-Related Entities: Methodology And Assumptions." We equalize the ratings on DBK with those on Kazakhstan as we believe there is an almost certain likelihood that the government will provide timely and extraordinary support to the institution in a potential stress scenario. Our view of the likelihood of extraordinary government support is based on: - DBK's integral link with the government of Kazakhstan, which fully owns DBK through National Management Holding Baiterek. DBK was established in 2001 by a Presidential Decree, and it has special public status as a national development institution under the Law On Development Bank of Kazakhstan. DBK does not have a banking license and is not required to comply with prudential regulations applicable to commercial banks. - DBK's critical role as the pr economy through commercial banks, in line with the provisions of DBK's strategy for 2014- 2023. Our 'b+' SACP for DBK reflects the anchor of 'bb-' for a financial institution operating in Kazakhstan, as well as its adequate business position, strong capital and earnings, moderate risk position, below average funding, and strong liquidity, as our criteria define these terms. Our assessment of DBK's business position as adequate balances its public- policy role as a specialized development institution with the aim of financing infrastructure and industrial projects in the private and public sectors, and its significant size, against the government-directed nature of its lending, which impedes its business stability. DBK is National Management Holding Baiterek's largest subsidiary and accounted for 60% of Baiterek Group's consolidated assets at year-end 2014. That said, DBK had assets of KZT1.4 trillion ($7.6 billion) as of March 31, 2015, making it somewhat smaller than the largest two commercial banks--Kazkommertsbank JSC (KKB) and Halyk Savings Bank of Kazakhstan (Halyk), both of which have assets of more than KZT2.6 trillion. In 2014, the majority of the bank's management board was replaced, so the track record of the new board is nascent. Our assessment of DBK's capital and earnings as strong reflects our expectation of continued regular and sizable capital injections from the government to support the bank's growth. We forecast that our risk-adjusted capital (RAC) ratio could weaken, but stay above 10% in the next 12-18 months due to expected moderating loan growth. It was 14.8% at year-end 2014. The amount and timing of the shareholder capital injections and credit growth greatly influence our RAC ratio. If the bank's future growth rates and its capital policy and philosophy started to improve or worsen materially from our current expectations, we would likely reconsider our RAC projection and capital assessment. As a state development bank, DBK's business strategy is policy focused rather than profit-driven. Nevertheless, the bank seeks to ensure a return sufficient to cover its operating and borrowing costs. DBK's income has been volatile and core profitability low over the past five years, and we expect it to remain so. Our moderate assessment of DBK's risk position mainly reflects a weaker loss experience than Kazakh commercial banks that have not been restructured, a very high share of loans in foreign currencies, and high industry concentrations. Because it transferred most of its nonperforming loans (NPLs) to Investment Fund of Kazakhstan, another subsidiary of National Management Holding Baiterek, in late 2013 and in 2014, NPLs reduced to 4.7% at year-end 2014 (including NPLs on leases) from 41% at year-end 2012. Restructured loans were an additional 2.2% on March 31, 2015. NPLs were covered by provisionsby 107% at year-end 2014. In our opinion, DBK's funding is below average, reflecting high refinancing risk due to its concentrated wholesale funding profile. Of loans from financial institutions, about 95% was accounted for by Export-Import Bank of China and China Development Bank. Debt securities are dominated by Eurobonds. We assess liquidity as strong, reflecting significant holdings of liquid assets and moderate wholesale debt repayments of KZT82 billion in 2015, including Eurobonds of $277 million (KZT51 billion) maturing in December 2015. We expect them to be replaced by loans from China Development Bank. We anticipate that the bank's liquidity would gradually decline to adequate levels in line with its strategy to increase percentage of loans on its balance sheet. The negative outlook on DBK mirrors our outlook on the sovereign ratings on Kazakhstan. We would likely revise the outlook or raise or lower the ratings on DBK if we took similar rating actions on the sovereign. We consider that the likelihood that we could lower the rating independently from the sovereign rating is low. This could, however, be the case if we no longer assessed extraordinary government support as almost certain--for example, if we consider that policy changes had weakened the bank's role, or if we saw signs of weakening government support. Analytical Group Contact: International Public Finance Ratings Europe; PublicFinanceEurope@standardandpoors.com [2015-07-15]