Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has today revised Kazakhstan-based Halyk Bank’s (Halyk) and Bank CenterCredit’s (BCC) Outlooks to Stable from Negative and Evolving, respectively. A third Kazakh bank, Kazkommertsbank (KKB), remains on Negative Outlook. All the ratings of the three banks are affirmed. A full list of rating actions is provided at the end of this commentary.

The Outlook revisions reflect the banks’ now solid (Halyk) and reasonable (BCC) loss absorption capacity compared to credit risks faced and potential further loan impairment recognition. The Outlooks also reflect the more positive outlook for the Kazakh economy, which makes further substantial deterioration in these banks’ asset quality less likely, in Fitch’s view: the agency forecasts economic growth of 3.0% in 2010 (2009E: contraction of -1.5%), and views further depreciation of the KZT unlikely in the near-term given the current oil price. Halyk’s and BCC’s ratings are also supported by their moderate large ticket debt repayments in the near- to medium-term, currently strong liquidity and sizable (Halyk) or significant (BCC) local franchises.

The ‘B-’ Long-term IDR and Negative Outlook on KKB reflects the still very high credit risks faced by the bank and the potential for eventual loan impairment recognition to exceed the bank’s loss absorption capacity. A higher share of foreign funding relative to peers is also a concern, with significant repayments due from 2011, although Fitch notes that refinancing risk has reduced considerably after large debt repayments in 2007-2009.

Halyk’s and KKB’s large franchises and the track record of government equity and funding injections into the two banks suggest the authorities could provide further moderate assistance to these entities, if required. However, given the government’s apparent reluctance to provide substantial support to the country’s banks in all circumstances (as highlighted by the defaults of BTA Bank, Alliance Bank and Temirbank in 2009, all rated ‘Restricted Default’) this assistance cannot be fully relied upon, in Fitch’s view. Potential rating upside exists for BCC should Korea’s Kookmin Bank (‘A+’/Stable) increase further its stake (currently 30%) in BCC and demonstrate a willingness to support BCC in case of need; however, Fitch notes Kookmin’s currently very gradual approach to increasing its participation in the bank’s capital.

Halyk’s asset quality remains weak, with NPLs (loans more than 90 days overdue) reaching 16.7% at end-November 2009 according to regulatory data, and restructured loans comprising 23% of the loan book at end-9M09 (all end-9M09 data is according to IFRS). Asset quality performance is undermined by the significant exposure to the troubled construction and real estate sectors (end-9M09: 20% of the loan book), while exposure to the 20 largest borrowers (26% of the loan book) and the share of FX lending (53%) are also high. However, reported loan impairment numbers have shown some signs of stabilisation in H209, with NPLs rising only 2pp during the five months to end-November. Furthermore, Halyk has built up considerable loss absorption capacity, and at end-November 2009 could have increased its impairment reserves to 31% of loans (from the actual level of 18.8%) before its total regulatory capital adequacy ratio would have fallen to the minimum 10% level.

Accrued (but not received) interest was a sizable 43% of equity (based on local accounts) at end-2009, which significantly undermines the quality of capital; however, this ratio was still notably lower than at peers. Halyk has a moderate share of foreign funding (end-2009: 15% of total liabilities) with distant large ticket repayments (from 2013). Liquidity is currently comfortable, with cash and bank placements up to one month comprising 21% of assets at end-2009; however, funding is heavily reliant on deposits from state-owned companies.

BCC’s reported asset quality numbers are much better than peers’, with NPLs moderate at 4% at end-November 2009 and restructured loans approximately 7.7% at end-Q309. However, Fitch notes that interest accruals amounted to 8% of end-2009 gross loans and accounted for a considerable 23% of 2009 interest income (both ratios in line with those at Halyk), suggesting somewhat weaker loan performance than headline asset quality numbers indicate.

Fitch also notes that BCC’s exposure to the construction and real estate sectors (17% of the loan book at end-9M09), individual borrower concentrations (20 largest borrowers comprised 24% of the portfolio) and share of foreign currency lending (58%) are broadly in line with those of Halyk. Loss absorption capacity is significant, with the bank able to increase its reserves/loans ratio to 24% at end-November 2009 (from the actual level of 11.2%) before the capital ratio would have fallen to 10%. However, the quality of capital is undermined by the sizable interest accruals (equal to 65% of equity at end-2009) and the large tier 2 component (35% of total capital). BCC’s foreign funding was a moderate 22% of liabilities at end-2009; although BCC will need to make a significant repayment in 2011 (equal to 7% of liabilities), the bank’s liquidity is currently strong, with cash and up to one-month bank placements accounting for 17% of assets at end-2009.

KKB’s reported asset quality metrics have continued to deteriorate in H209, with NPLs rising to 17.3% at end-November 2009 from 8.8% at end-H109 and restructured loans standing at 18.1% at end-9M09 (on a consolidated basis). Credit risks remain substantial in light of the high share of lending to the construction and real estate sectors (end-9M09: 34%), while borrower concentrations and foreign currency lending (71%) are also higher than at peers. Most large exposures continue to show clear signs of impairment, in Fitch’s view, while high interest accruals (equal to 38% of unconsolidated interest income during 2009 and 89% of equity at end-2009) underline weaknesses in loan performance. Loss absorption capacity appears to be high (maximum reserves/loans ratio of 31% at end-November 2009 compared to actual ratio of 24.9%), but this is undermined by concerns about quality of capital and potential loan impairment. At the same time, Fitch notes that the reduction in foreign debt has been substantial during H209 (to around 33% from 46% of liabilities) with the next significant repayments coming due only in 2011 (equal to 7% of end-2009 liabilities).

Credit updates on Halyk, KKB and BCC will be published shortly on www.fitchratings.com.

Rating actions are as follows:

Halyk Bank of Kazakhstan
Long-term foreign currency IDR: affirmed at ‘B+’; Outlook revised to Stable from Negative
Long-term local currency IDR: affirmed at ‘B+’; Outlook revised to Stable from Negative
Short-term foreign currency IDR: affirmed at ‘B’
Short-term local currency IDR: affirmed at ‘B’
Support rating: affirmed at ‘5’;
Individual rating: affirmed at ‘D/E’
Support Rating Floor: affirmed at ‘No Floor’
Senior unsecured debt: affirmed at ‘B+’; Recovery Rating at ‘RR4’

Kazkommertsbank
Long-term foreign currency IDR: affirmed at ‘B-’; Outlook Negative
Long-term local currency IDR: affirmed at ‘B-’; Outlook Negative
Short-term foreign currency IDR: affirmed at ‘B’
Short-term local currency IDR: affirmed at ‘B’
Support rating: affirmed at ‘5’;
Individual rating: affirmed at ‘E’
Support Rating Floor: affirmed at ‘No Floor’
Senior unsecured debt: affirmed at ‘B-’; Recovery Rating at ‘RR4’
Subordinated debt: affirmed at ‘CC’; Recovery Rating at ‘RR6’
Tier 1 perpetual subordinated notes: affirmed at ‘CC’; Recovery Rating at ‘RR6’

Bank Centercredit
Long-term foreign currency IDR: affirmed at ‘B’; Outlook revised to Stable from Evolving
Short-term foreign currency IDR: affirmed at ‘B’
Support rating: affirmed at ‘5’
Individual rating: affirmed at ‘D/E’;
Senior unsecured debt: affirmed at ‘B’; Recovery Rating at ‘RR4’