OREANDA-NEWS. June 17, 2010. Fitch Ratings has revised Kazakhstan-based Kazkommertsbank's (KKB) Outlook to Stable from Negative, whilst affirming the bank's Long-term foreign currency Issuer Default Rating (IDR) at 'B-'. A full rating breakdown is provided at the end of this comment, reported the press-centre of KASE.

The Outlook revision reflects KKB's somewhat eased liquidity pressures following fresh deposit inflows after large foreign debt repayments in 2009, and more evidence of regulatory forbearance in respect of the bank's loan impairment recognition. It also reflects the more positive outlook for the Kazakh economy, which makes a further substantial deterioration in the bank's asset quality less likely.

Fitch had previously cited capital pressure as one of the drivers of the Negative Outlook. The agency continues to believe that eventual loan impairment recognition may exceed the bank's current loss absorption capacity, meaning there will likely be a potential need for future recapitalization. KKB's reported asset quality metrics have continued to deteriorate in recent months, with NPLs rising to 23.0% at end-Q110 from 21.1% at end end-2009.

Furthermore, Fitch understands that underlying asset quality is considerably weaker than the NPL number suggests, with the majority of large corporate exposures having clear signs of impairment and accrued interest comprising a large 34% of gross interest income under IFRS in 2009. Fitch understands that little has been done to date to accelerate work-outs of impaired loans, and write-offs have been close to zero since the beginning of the crisis in H207.

Nevertheless, it is becoming increasingly clear that the regulator will continue to allow KKB to recognise impairment only to the extent that it enables the bank to show reasonable performance and to comply with prudential regulations. This provides KKB with the necessary time to generate some profit from the performing parts of its business in order to cover NPL losses. The agency also expects that Kazakhstan's anticipated economic recovery will likely help boost collateral values and improve the condition of some borrowers, thereby ultimately enhancing bad loan recoveries. In addition, sovereign-owned entities continue to keep large deposits with the bank, supporting its funding profile.

Fitch views these funds as unlikely to be withdrawn in any substantial amount in the medium-term, or at least until KKB's liquidity profile permits. Coupled with only moderate foreign debt repayments in the coming two years and continuous deposit inflows, this currently provides the bank with some financial flexibility, contributing to the Stable Outlook.

That said, Fitch notes that KKB's poor asset quality, resultant capital adequacy concerns, poor profitability and weaknesses in its funding profile continue to be major constraints for its ratings. Despite the Outlook revision, until there is more certainty with respect to the value of its assets and/or recapitalization takes place, there will be very limited upside potential for the bank's ratings.

The rating actions are as follows:

Long-term foreign and local currency IDRs: affirmed at 'B-'; Outlooks revised to Stable from Negative

Short-term foreign and local currency IDRs: affirmed at 'B'

Support Rating: affirmed at '5'

Individual Rating: affirmed at 'E'

Support Rating Floor: affirmed at 'No Floor'

Senior unsecured debt: affirmed at 'B-'; Recovery Rating 'RR4'

Subordinated debt: affirmed at 'CC'; Recovery Rating 'RR6'

Tier 1 perpetual subordinated notes: affirmed at 'CC'; Recovery Rating 'RR6'

KKB is the largest bank in Kazakhstan. Significant stakes are held by the chairman of the board, Samruk-Kazyna National Fund and a private fund Alnair Capital Holding.

Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 29 December 2009, are available at www.fitchratings.com.