S&P downgrades Kazakh Kazkommertsbank’s rating

18 May 2016 10:57 (UTC+04:00)

S&P Global Ratings lowered to 'CCC+' from 'B-' its long-term counterparty credit rating on Kazakhstan-based Kazkommertsbank JSC (KKB), the agency reported on May 17.

Also, S&P lowered the Kazakhstan national scale rating to 'kzB-' from 'kzBB-'. The agency has also affirmed the 'C' short-term rating on KKB. The outlook is negative.

At the same time, S&P lowered the rating on the subordinated debt of the bank to 'CCC-' from 'CCC' and on the junior subordinated debt to 'CC' from 'CCC-'.

The downgrade reflects S&P's view that KKB is experiencing increasing pressure from a combination of external and internal factors.

"The bank's liquidity and capitalization ratios suggest that its short-term (under one year) prospects remain assured," S&P said. "However, S&P thinks that KKB is increasingly vulnerable in the long term, as shown by a loss the bank made in 2015 (despite the transfer of nonperforming assets to BTA). Additionally, the operating environment is likely to remain weak, and S&P has seen no clear progress from management in setting out a credible strategy to ensure the bank's long-term health."

S&P continues to see downside risks to this projection, given the bank's large problem loan portfolio and the embedded currency risk--almost half of KKB's loan book is denominated in foreign currency.

At this stage, S&P anticipates no improved capacity at the bank to recover problem loans.

The negative outlook on KKB reflects S&P's opinion that the bank's asset quality and profitability will remain strained, and could still deteriorate further in the coming 12-18 months.

This view takes into account KKB's still-sizable portfolio of NPLs, and S&P's view that already weak macroeconomic conditions are unlikely to improve soon. The latter is likely to depress margins and sustain foreign currency-related risks for KKB and its clients. In addition, S&P does not yet see a credible strategy to restore the bank's health in the long term.

S&P would likely lower the ratings on the bank if S&P observed notable deterioration in its short-term prospects, for example, if its liquidity and funding metrics weakened or if it came close to its minimum regulatory capital requirements. S&P could also lower the ratings if, for example, S&P saw reducing willingness or ability of the government to support KKB. This could be linked to us lowering S&P's sovereign ratings on Kazakhstan.

S&P could revise the outlook to stable if the bank's operating conditions stabilize and S&P see good execution from the new management team. Notably, S&P would look for stabilizing asset quality, a return to profitability, and the delivery of a strategy that will bolster the bank's long-term health.

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