S&P affirms ratings of Eurasian Bank, outlook stable

/Standard & Poor's, Moscow, June 30, 2016, headline by KASE/ – S&P Global Ratings today affirmed its 'B' long-term and 'B' short-term counterparty credit ratings on Kazakhstan-based JSC Eurasian Bank. The outlook is stable. At the same time, we affirmed our 'kzBB' Kazakhstan national scale rating on the bank. The affirmation reflects our view of a Kazakh tenge (KZT) 15 billion (about US$45 million as of June 29, 2016) capital injection that Eurasian Bank will receive from shareholders by the end of August 2016. Thanks to this capital increase, we expect that bank's loss-absorption capacity will remain modest, with S&P Global Ratings' risk-adjusted capital (RAC) ratio above 5% in 2016-2017. We note that the weak operating environment and unpredictable shocks in the domestic economy could expose Eurasian Bank to higher-than-expected losses. However, we believe that these risks are adequately mitigated by the bank's committed shareholders, risk-averse policy introduced by its experienced management team, leading market positions in non-mortgage retail lending, especially auto loans, and diversified business model among corporate and retail segments. We view positively the shareholders' ability and willingness to support the bank. We believe that additional equity injections beyond KZT15 billion this year are possible if needed or if the bank revises its strategy, which currently entails limited asset growth. We project low earnings capacity, given potential sector instability in 2016, which can be caused by recurrent interest rate increases on short-term money market instruments and further local currency temporally movements. Under our base case, Eurasian Bank's expected RAC ratio will exceed 5.0% in 2016-2017 against 4.5% on Dec. 31, 2015. We factor in the following assumptions: Modest loan portfolio growth of 3%-4% in 2016-2017, due to adverse economic conditions; Slightly positive or flat total assets dynamics in 2016 followed by a 10%-12% decrease in 2017; Capital injection of KZT15 billion received by end–August 2016; Cost of risk of about 3% in 2016-2017; Market sensitive losses of about 7%-8% of operating revenues in 2016 due to potential recurrent shortage or further moderate devaluation of local currency; Consequently 2%-3% losses on average equity in 2016 and 0%-0.5% return on average equity in 2017; and Full earnings retention. Despite a significant tightening of the bank's credit approval rates since mid-2014 and an enhancement of collection procedures, a prolonged downturn in the economy led to an increase of Eurasian Bank's problem assets. The bank's share of nonperforming loans (NPLs; overdue more than 90 days) has increased to 12% of total lending as of March 31, 2016. Although this is a jump from 9% as of end-2014, according to International Financial Reporting Standards (IFRS), it is still broadly in line with our IFRS sector trend expectations for 2016 of 12%- 14%. In addition, NPL coverage by loan loss provisions was only about 50% as of Jan. 31, 2016, which we consider low. We think that Eurasian Bank will likely counter this by raising its provisioning expenses going forward, which supports our expectation of 3% cost of risk in 2016-2017. While we have observed that the bank's liquidity position is weakening, we don't anticipate that it will have difficulties meeting its financial liabilities in 2016-2017, in particular repaying the National Bank of Kazakhstan foreign exchange swap in July 2016. Under this transaction, Eurasian Bank is to repay KZT27 billion and receive US$150 million. Therefore, Eurasian Bank's share of broad liquid assets will increase to 11.5%-13.5% of the total balance sheet as of Aug. 1, 2016, from 9.0% as of April 1, 2016. We expect the bank will maintain this ratio at 13%-15% until the end of 2016, and we will closely monitor the changes. The stable outlook on Eurasian Bank reflects our expectation that, over the next 12-18 months, the bank's experienced management team will be able to mitigate the pressure on the bank's modest loss-absorption capacity despite prevailing downside sector and economy risks. We also expect that the bank will continue its diversified operations as a leading provider of financial services, especially in specific retail subsegments. We would take a negative rating action if Eurasian Bank's projected RAC ratio fell below 5% over the next 12-18 months due to substantially higher-than-expected market sensitive or credit losses, or in case of deviation from the current limited growth strategy in the absence of sufficient equity injections. Likewise, further deterioration of the bank's liquidity metrics or a prolonged period of the share of NPLs in total lending materially exceeding our base-case level of 10%-12% in 2016 would trigger a downgrade. If Eurasian Bank were to lose its leading positions in the auto loans or other non-mortgage retail segments over the next 12-18 months, we would also view this as negative for the rating. A positive rating action is unlikely in the next 12-18 months given the increasing economic and industry risks in the Kazakh banking sector. Primary Credit Analyst: Suren Asaturov, Moscow; suren.asaturov@standardandpoors.com Secondary Contact: Annette Ess, CFA, Frankfurt (49) 69-33-999-157; annette.ess@spglobal.com Additional Contact: Financial Institutions Ratings Europe; FIG_Europe@standardandpoors.com [2016-06-30]