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Fitch upgrades BTA Bank to 'B-', maintains on RWP; affirms KKB at 'B'

August 19, 2014

Fitch Ratings has upgraded Kazakhstan-based BTA Bank's Long-term Issuer Default Ratings (IDRs) to 'B-' from 'CCC' and maintained them on Rating Watch Positive (RWP).

The upgrade of BTA's Long-term IDRs to 'B-' from 'CCC' reflects Fitch's opinion of the moderately improved support prospects for BTA as a result of KKB's acquisition of a 46.5% stake in the bank's ordinary share capital in July 2014 from the National Welfare Fund Samruk Kazyna (SK), and its receipt from SK of a further 4.5% of BTA's shares under a trust management agreement, giving KKB operational control over BTA.

As part of the divestment, SK also sold another 46.5% equity stake in BTA to a private investor. In Fitch's view, KKB is likely to have a high propensity to support BTA, if needed, given plans to integrate the two banks and our expectation that BTA will be consolidated in KKB's IFRS accounts and qualify as a material subsidiary under the cross-default clauses in KKB's Eurobonds.

The one-notch difference between KKB's and BTA's ratings reflect BTA's still weak balance sheet and its large size, relative to KKB, which may in certain circumstances constrain the propensity and ability of KKB to provide support.

The affirmation of BTA's Viability Rating (VR) at 'ccc' reflects the limited recent changes in the bank's standalone credit profile, which remains constrained by weak asset quality, capitalisation and performance. Upside potential for the rating is limited given the deep-seated nature of the bank's problems.

BTA continues to be burdened by its extremely high volume of non-performing loan (NPLs; 88% of gross loans at end-1Q14), significant unreserved problem loans and illiquid legacy investments in equity securities (23% of Fitch core capital (FCC) at end-1Q14).

"We estimate BTA's NPLs, net of specific IFRS reserves, at a high 88% of FCC. Despite the relatively high 25% FCC/risk-weighted assets ratio at end-1Q14, capitalisation is weakened by the fact that 60% of FCC relates to the fair-value adjustments (reductions) to BTA's low-rate liabilities, which will have to be accrued back through the income statement."

Pre-impairment profit (net of interest revenues accrued but not received in cash) turned moderately positive in 2013, but internal capital generation is still weak. BTA's liquidity risks are currently limited in view of its considerable liquid-asset cushion, amounting to 61% of its customer deposits or 18% of liabilities at end-1Q14, its granular third-party deposit base and the limited near-term Eurobond maturities.

The agency has also affirmed Kazkommertsbank's (KKB) Long-term IDRs at 'B' with a Stable Outlook. KKB's ratings reflect the bank's weak asset quality and the potential need for further provisioning of its problem loans. However, the ratings also consider KKB's positive pre-impairment profit (net of accrued interest), moderate refinancing and liquidity risks, and the track record of significant debt repayments in a challenging environment. In Fitch's view, risks and uncertainties relating to the BTA acquisition, and the reduction in capital ratios resulting from an ongoing share buyback, are both moderately negative for KKB's credit profile. However, these risks are consistent with the bank's ratings.

KKB's high 31% NPL ratio at end-1Q14 and its sizeable exposure to weakly performing real-estate loans (53% of gross loans), a significant portion of which relates to land investments are credit negative. KKB's loan book could require further provisioning given the still moderate (58%) specific IFRS reserve of NPLs (total reserve coverage of NPLs was 111%) and the fact that only a moderate portion of the real estate loans are currently reported as NPLs. Net NPLs (NPLs less specific IFRS reserves for NPLs) were a high 1.2x FCC at end-1Q14, and Fitch estimates this ratio may rise to 1.8x following the consolidation of BTA. Total problem loans at KKB (NPLs and restructured loans) net of total reserves stood at 90% of FCC.

Potential benefits from loan purchases by the government Problem Loan Fund, or co-ordinated work-out of KKB's and BTA's largest (sometimes overlapping) exposures, are highly uncertain at present. Fitch estimates that KKB's FCC/risk-weighted assets ratio may fall to about 10% following the consolidation of BTA, from 14.5% at end-1Q14, as a result of (i) the BTA acquisition; (ii) a buyback of 17.4% of the bank's share capital in August 2014, mainly from SK; and (iii) adjustments to the book values of some of BTA's assets and liabilities. This would represent a significant reduction in the bank's loss absorption capacity, but would still be consistent with KKB's 'B' rating, in Fitch's view.

Furthermore, there is still significant uncertainty regarding the ultimate impact of the BTA acquisition on KKB's capitalisation, and the scope (and timing) of any further provisioning requirements on the two banks' loan books. KKB's liquidity is comfortable due to the bank's solid deposit collection capabilities, potential access to government funding programmes and limited near to medium-term wholesale debt repayments. Liquidity management might be somewhat complicated in light of the high proportion of SK deposits in the funding structure.

However, Fitch expects these deposits to be reasonably stable. KKB's performance weakened significantly in 1Q14, mainly as a result of trading losses on the back of KZT devaluation. However, Fitch views the bank's 2013 pre-impairment profit (net of accrued interest and fair value adjustment in 4Q13, equal to 2% of average net loans) as a more meaningful indicator of the bank's ability to absorb losses through the income statement.

Pre-impairment profit in absolute terms should increase slightly following the BTA consolidation, given the latter's moderately positive result and potential for some moderate cost synergies.

KKB's and BTA's IDRS KKB's VR, IDRs, and debt ratings could be downgraded if the bank's solvency deteriorates significantly more than Fitch currently anticipates as a result of greater than expected losses on its own or BTA's problem assets. Successful workouts of problem loans, resulting in a strengthening of the capital position, could result in upward pressure on the ratings. The RWP on BTA's Long-term IDRs and senior debt rating reflects the potential for these ratings to be upgraded to 'B' as a result of closer integration between KKB and BTA.

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Source: AKIpress News Agency (Kyrgyz Republic)

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