Standard & Poor's Ratings Services kept its 'B' long-term issuer credit rating on Kazakhstan-based Kazkommertsbank (KKB) on CreditWatch with negative implications.
The rating agency also kept on CreditWatch negative its 'kzBB' national scale rating on the bank, its 'CCC' rating on its subordinated debt, and its 'CCC-' rating on its junior subordinated debt.
S&P placed the ratings on KKB on CreditWatch negative in October 2014. This was based on the view of the agency that KKB's capitalization on a consolidated basis had weakened following its acquisition of Kazakhstan-based BTA Bank and the buyback of shares in both banks, which totaled 11.8 percent of KKB's capital on a consolidated basis as of June 30, 2014.
“We think that the bank's capital will likely remain weak given its weak earnings generation and the burden of overwhelming levels of nonperforming assets at both KKB and BTA,” said the message.
As of June 30, 2014, risk-adjusted capital (RAC) ratio calculated by Standard & Poor's for KKB on a consolidated basis was 5 percent before adjustments for diversification. The rating agency projects that this ratio will decrease to below 5 percent over the next 12-24 months without sufficient government support, incorporating the impact of the share buyback program, and assuming no significant growth of earning assets of the bank.
“We also expect the bank's profitability to remain low in the coming two years, largely due to the significant amount of problem assets at BTA and KKB (63 percent of the combined loan book) and low generation of new business,” said the agency.
S&P thinks that it will be extremely challenging for the management of KKB to achieve meaningful problem asset recovery at BTA and KKB without material government support.
Given the significant market share of the combined bank in the banking sector of Kazakhstan, the government is willing to provide some support and has set up the Problem Assets Fund (PAF) to facilitate the cleanup exercise. The government has allocated about 250 billion Kazakhstani tenge (about $1.4 billion) to the PAF to help resolve the problem assets of BTA and KKB. In principle, this may enable KKB to clean up its balance sheet, supporting the bank’s capitalization.
“However, we are aware that certain changes and approvals are still required for the bank to be able to start transferring problem assets to the fund,” said the message. “We expect these to be received within the next two-to-three months. In addition, we are currently awaiting information on the terms of the asset transfer that would enable us to assess the potential impact of the transfer on KKB’s capital position.”
S&P will resolve the CreditWatch once the agency has information regarding the terms and timing of the support to be provided by the Kazakhstan government for the working-out of problem assets at KKB and BTA through the PAF, taking into account any other developments that might change the agency’s assessment of the capital of the consolidated bank. The rating agency expects to have more clarity on these issues over the next three months.
S&P can lower the ratings if KKB does not receive sufficient capital relief to cause the agency’s forecast RAC ratio to rise sustainably above 5 percent. A downgrade would become more likely if the agency observes a further deterioration in the quality of the loan portfolio, weakening the capital position
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