OREANDA-NEWS. S&P Global Ratings said today that it was keeping its 'B/B' long - and short-term counterparty credit ratings and 'kzBB' Kazakhstan national scale rating on Bank of Astana JSC on CreditWatch with negative implications.

We placed our ratings on Bank of Astana on CreditWatch negative on April 25, 2016. Our rating action reflected Bank of Astana's materially reduced capitalization at year-end 2015, an expected delay in planned capital injections, and our uncertainty about the bank's ability to restore its capitalization by year-end 2016 and maintain it at a strong level thereafter.

We assess capital and earnings as strong for very few banks in Kazakhstan or even globally. This is typically because the risk weights in our risk-adjusted capital (RAC) framework are often much higher than under regulatory measures. Therefore, achieving a RAC ratio over 10% is typically commensurate with very high tier 1 regulatory capitalization. Moreover, we expect that banks with strong capital and earnings will demonstrate the ability to sustain such a high level of capitalization. Notably, when such a bank is in a rapid growth phase, management typically ensures that capital injections lead, not lag, asset growth.

Notwithstanding the small improvement in the bank's RAC ratio in the first half of 2016, our remaining doubts about the bank's ability to deliver and sustain strong capitalization stem from several factors:First, our RAC ratio for the bank improved only slightly to 6.9% at midyear 2016 from 6.7% at year-end 2015, compared with 13.1% at year-end 2014. It therefore remains significantly below the 10% threshold beyond which we may assess capital and earnings as strong. Second, in the first half of 2016, the bank's management did not deliver on its plan to reduce risk-weighted assets (RWAs), one of the two key elements of its strategy to strengthen capitalization. On the contrary, total assets increased by 34% and gross loans by 24%, corresponding to about a 19% increase in RWAs. Although management plans to redouble its efforts to reduce RWAs in the second half of 2016, we see significant execution risks in achieving this. We therefore doubt that the additional Kazakhstani tenge (KZT) 4 billion (about US$12 million) capital increase, scheduled for September 2016, will be sufficient to improve the RAC ratio to at least 10% by year-end 2016.Third, Bank of Astana planned to sell loans to other banks, not renew credit lines and guarantees, and realign its balance sheet toward cash from income-producing loans. We view these actions as somewhat negative for the development of the bank's franchise and profitability. Furthermore, given the broader objective of strong, profitable growth, we anticipate that such deleveraging and derisking might prove to be transitory. Fourth, Bank of Astana's weak internal capital generation deteriorated further in 2015 and in the first half of 2016, with the annualized return on average assets at 0.38% in the first half of 2016 compared with 1.1% in 2014. This is also significantly lower than the Kazakh banking system average of 1.4% in the first five months of 2016. We expect this ratio will remain below 1% in the next 18 months. If earnings fall short of our projections, this would imply the need for a larger capital injection to compensate. That said, we understand that the bank's shareholders stand ready to commit substantial additional capital (beyond the KZT4 billion) later in 2016 if, as we expect, the planned deleveraging falls short. Furthermore, we understand that the bank will in future pursue a financial policy of injecting capital ahead of asset growth. In our view, these two steps give credence to management's stated intention to build and maintain RAC comfortably above 10%. This may also offer greater predictability of credit availability to the bank's customers, supporting its franchise. As a first step, we will closely observe the bank's progress in the third quarter.

The ratings on Bank of Astana continue to reflect the 'bb-' anchor that is our starting point for our rating on commercial banks operating in Kazakhstan. They also reflect the bank's weak business position, due to its small asset base and modest franchise in the Kazakh banking sector. Our moderate risk position assessment reflects the risks associated with managing rapid loan growth and our expectation of moderate asset quality deterioration as loans season amid the challenging economic environment. We assess the bank's funding as average and its liquidity as adequate and in line with that of other rated small Kazakh banks.

The long-term rating on the bank is at the level of its stand-alone credit profile (SACP) because we consider the bank to be of low systemic importance and we do not expect it will receive support from the Kazakh government.

The CreditWatch reflects our continued uncertainty regarding Bank of Astana's ability to restore capitalization at a strong level by end-2016 and maintain it thereafter. We plan to resolve the CreditWatch within the next three months.

We expect to lower our long-term rating on the bank to 'B-' and the short-term rating to 'C' in the next three months if the bank does not increase its RAC ratio to at least 8.5% by Sept. 30, 2016.

We could affirm the ratings if the bank demonstrates good progress on its recapitalization, as measured by our RAC ratio, in the third quarter. We would also need to be confident that the bank will not only complete the recapitalization by year-end, but also be able to maintain it at such levels through the forecast horizon of 12-18 months. This scenario also assumes that the bank's risk position will not deteriorate and its funding and liquidity metrics will remain adequate.