OREANDA-NEWS. On June 11, 2009 Standard & Poor's Ratings Services said that it has lowered its long-term counterparty credit ratings on two of Kazakhstan's leading banks, to 'B' from 'B+', and Halyk Savings Bank of Kazakhstan, to 'B+' from 'BB-'. The outlooks are still negative, reported the press-centre of KASE.

At the same time, we affirmed the short-term ratings on Halyk at 'B' and lowered them on KKB to 'C' from 'B'.

"The rating actions reflect our view of the continuing downward pressure on these banks' asset quality, capitalization, funding, and liquidity," said Standard & Poor's credit analyst Ekaterina Trofimova.

These concerns are partly mitigated by the state's ongoing support to these banks through liquidity support; by their good market positions, particularly among large Kazakh corporate clients for KKB and the retail sector for Halyk; and adequate core revenue generation, supported by aggressive cost management. Cautious and fairly efficient business and operational adjustments, as well as deleveraging, are also helping the banks to adapt to their worsening operating environment.

Ranked among the top three Kazakh banks, KKB had total assets of Kazakhstani tenge (KZT) 2.6 trillion (US 21 billion), and Halyk had total assets of KZT1.65 trillion (US12.9 billion) on Dec. 31, 2008.

Standard & Poor's classifies KKB and Halyk as systemically important banks in Kazakhstan's financial sector. The ratings on the two banks reflect their stand-alone credit profiles, with no uplift for expected extraordinary parental or government support, which we consider as uncertain. The Kazakh government acquired a stake of 21% in KKB and 20.9% in Halyk, through common capital injections of KZT36 billion in May 2009 and KZT27 billion in March 2009, respectively. The government stated that it will exit from the two banks' capital when the market situation becomes more favorable.

Like all Kazakh banks, KKB and Halyk are suffering from sharp asset quality deterioration, exacerbated by the deteriorated economic environment and the lack of new financing within the economy. At KKB, nonperforming loans (overdue for more than 30 days for corporate customers and for more than 60 days for retail customers, including performing loans to the same borrower) increased to 8.1% at year-end 2008 from 3% at year-end 2007, and continue to grow. Restructured loans accounted for additional 9% of total loans on Dec. 31, 2008. Halyk had 14.6% of its loans overdue for more than 30 days as of March 2009. However, if we include restructured loans and performing loans to nonperformers' related parties, total loans under stress for Halyk would be slightly less than double that level, at the same date.

Asset quality deterioration is increasingly straining the banks' profitability and capitalization, mainly due to higher provisioning needs. Kazakh banks' previous strategy of aggressively tapping international debt markets to fund fast balance sheet growth has put them in a vulnerable position following the global liquidity squeeze and limited viable refinancing prospects in the foreseeable future.

Although customer deposits have so far been relatively stable, particularly government-related deposits, a wider drop in customer deposits could dramatically affect the liquidity position of these banks. Upcoming foreign debt repayments, albeit lower for Halyk than for KKB, limit the banks' capacity to face deposit outflows.

Profitability benefits from relatively high margins and strong cost containment, but is pressured by an increase in cost of risk. In our view, the banks are tightly capitalized in light of their high lending concentrations, rising credit provisions and losses, and the risky operating environment.

"The negative outlook on the two banks reflects the challenges they are facing, mainly deteriorating asset quality and liquidity amid the weak operating environment," said Standard & Poor's credit analyst Magar Kouyoumdjian.

We expect asset quality to deteriorate further with problem loans (including restructured loans) likely to exceed 35% in the next quarters. This will continue to hurt capitalization and financial performance.

If asset quality or liquidity weaken more than we currently expect or if domestic economic problems worsen to the extent that they hurt the banks' credit standing, we would lower their ratings.

The potential for an upgrade is currently remote. However, significant reductions in wholesale funding and loan concentrations, lower foreign currency lending, stronger capitalization, and improved asset quality, would lead us to raise the ratings on these banks.