Fitch forecasts pressure on asset quality in two Kazakh banks

Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDRs) of JSC SB Alfa Bank Kazakhstan (ABK) at 'B+' and AsiaCredit Bank JSC (ACB) at 'B'. The Outlooks are Stable, Fitch Ratings said.

JSC SB Alfa Bank Kazakhstan:

Long-term foreign currency IDR affirmed at 'B+'; Outlook Stable
Short-term foreign currency IDR affirmed at 'B'
Long-term local currency IDR affirmed at 'B+'; Outlook Stable
National Long-term rating affirmed at 'BBB(kaz)'; Outlook Stable
Viability Rating affirmed at 'b+'
Support Rating affirmed at '4'
Senior unsecured debt: affirmed at 'B+', Recovery Rating 'RR4'
National senior unsecured debt rating: affirmed at 'BBB(kaz)'

JSC AsiaCredit Bank:

Long-term foreign currency IDR: affirmed at 'B'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Long-term local currency IDR: affirmed at 'B'; Outlook Stable
National Long-term rating: affirmed at 'BB(kaz)'; Outlook Stable
Viability Rating: affirmed at 'b'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: affirmed at 'B', Recovery Rating 'RR4'
National senior unsecured debt rating: affirmed at 'BB(kaz)'

The banks' IDRs and National Ratings are based on the banks' individual strength, which in turn is reflected in their Viability Ratings (VRs). The VRs reflect the banks' small, albeit growing, franchises, relatively moderate loss absorption capacity (tighter at ACB) in light of fast recent growth and seasoning loan book, and high concentrations on both sides of the balance sheet. The VRs also take into account the banks' reasonable liquidity positions, strong profitability (ABK), and track record of equity injections provided by the shareholder and the agency's expectation that these will continue (ACB), the statement said.

Seasoning of the loan book has resulted in an increase in non-performing loans (NPLs, 90 days overdue) at ABK to 5.2% at end-9M14 (1.2% at end-2013) and at ACB to 9.7% at end-2014 (2013: 4.1%).

ABK also had about 6% of restructured loans compared with only 0.6% at ACB. However, ACB has weaker coverage, with unreserved NPLs amounting to 39% of its Fitch core capital (FCC) at end-2014, while ABK's NPLs were 1.2x covered by reserves, the statement said.

The agency expects asset quality pressure to persist in 2015 as a result of the slowdown in Kazakhstan's economy. At the same time, the potential tenge devaluation will likely have a manageable impact on the banks' asset quality, as FX lending was moderate at around 20% of gross loans at ABK and 9% at ACB at end-2014.

Capitalisation is moderate, with a total regulatory capital ratio of 13.2% at ABK (down by 2.6 ppts in 2014) and 14.1% at ACB (down by 7.6 ppts).

ABK supports capitalisaiton through earnings generation (ROE of 27% in 9M14), while ACB's modest profitability (ROE of 7% in 2014) means that it relies heavily on capital injections from the shareholder.

The agency estimates that the impact on capital ratios of a 30% tenge devaluation would likely be negligible for ACB and about 1.5 ppts for AKB (due to an open short FX position of 27% of equity at end-2014).

Both banks maintain a reasonable liquidity cushion sufficient to withstand significant customer accounts outflows (20% at ABK at end-2014 and 28% at ACB at end-1M15). However, depositor concentration level is higher at ACB (top 20 made up 73% of customer funding at end-2014) compared with ABK (47%) and therefore the former is more vulnerable to sudden outflows of the largest accounts.

ABK's liquidity position additionally benefits from a KZT9bn (4% of liabilities) unutilised credit line from Alfa Bank Russia (ABR, BB+/Negative).

Strengthening of their franchises while maintaining reasonable asset quality and performance would be positive for the banks' ratings. A downgrade could result from deterioration of asset quality and capitalisation, as well as (although less likely) significant deposit outflows, absent of sufficient and timely equity and/or liquidity support from shareholders, the statement said.

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