Moody's Investors Service has 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.
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 returnon average assets of 5.4% in 2013 because of the rapid expansion in high-marginconsumer 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 needsfor Kaspi Bank in the next 12 to 18 months that will exert negative pressure onthe 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 tonegative 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 caseof need. Kaspi Bank's market share in retail deposits increased to 10.3% atyear- 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 ofsystemic support is counterbalanced by the rating agency's assessment of the bank's asset quality risks; therefore, the outlook on Kaspi Bank's depositratings remains stable. Moody's asses a very low probability of support toKazakhstan banks' bondholders from the government, as evidenced by the bail-inof a few large failed banks in the past several years when only depositors weresupported.