News Column

Moody's affirms B1 debt and deposit ratings of Kazakhstan's Kaspi Bank

July 10, 2014



Moody's Investors Service has today affirmed Kaspi

Bank JSC's B1/Not Prime deposit ratings and the E+ standalone bank

financial strength rating (BFSR), equivalent to a baseline credit

assessment (BCA) of b1. Moody's has also affirmed the bank's B1 senior

unsecured local- and foreign-currency debt ratings, its B2 subordinated

local currency debt ratings and Ba2.kz national scale rating. The outlook

on Kaspi Bank's BFSR and long-term deposit ratings remains stable while

the outlook on the bank's debt ratings was changed to negative from

stable.

RATINGS RATIONALE

The affirmation of Kaspi Bank's ratings reflects its leading position in

Kazakhstan's consumer lending segment and strong loss absorption cushion.

As at year-end 2013, the bank's Tier 1 capital adequacy and total capital

adequacy ratios stood at 13.1% and 17.3%, respectively, with coverage of

non-performing loans (loans overdue by 90 days) at 111% of loan loss

reserves. Moody's also notes the bank's strong profitability. Kaspi Bank

reported return on average assets of 5.4% in 2013 because of the rapid

expansion in high-margin consumer loans and credit cards that was aided

by the highly efficient operational and distribution platform. Against

this background, Kaspi Bank is comfortably positioned to withstand

increasing competition as more players enter into this rapidly expanding

segment. Kaspi Bank is currently Kazakhstan's largest loan originator in

the segment of "high-margin/high risk" consumer loans.

At the same time, Moody's notes that despite the recently introduced

regulatory measures to limit Kazakhstan banks' expansion into consumer

lending, household indebtedness has been rapidly increasing over recent

years and will continue to build up. Moody's expects consumer loans to

grow by 25% in 2014, which is considerably above the average growth in

disposable income. The rating agency also expects that the one-off local

currency devaluation in February 2014 will negatively weigh on

households' disposable income and their ability to service debts. Moody's

expects increasing provisioning needs for Kaspi Bank in the next 12 to 18

months that will exert negative pressure on the bank's profitability and

might render its franchise vulnerable. These expectations are based on:

(1) the above-mentioned asset quality risks; (2) the bank's loan

performance in 2013 (overdue retail loans increased year-on-year to 21.0%

from 17.8%); and (3) the bank's management data of the most recent retail

loan performance. The change of the outlook on the bank's debt ratings to

negative from stable was triggered by above-mentioned trends and by Kaspi

Bank's almost total reliance on consumer lending for revenue.

Kaspi Bank's previous rapid loan growth (that was predominantly funded by

retail deposits) resulted in the bank's growing market share in deposits

and indicates an increasing probability of systemic support for

depositors, in case of need. Kaspi Bank's market share in retail deposits

increased to 10.3% at year-end 2013 from 9.3% at year-end 2012 and 8.1%

at year-end 2011 (source of data: National Bank of Kazakhstan). Moody's

expectation of higher probability of systemic support is counterbalanced

by the rating agency's assessment of the bank's asset quality risks;

therefore, the outlook on Kaspi Bank's deposit ratings remains stable.

Moody's asses a very low probability of support to Kazakhstan banks'

bondholders from the government, as evidenced by the bail-in of a few

large failed banks in the past several years when only depositors were

supported.


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Source: EMBIN (Emerging Markets Business Information News)


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