OREANDA-NEWS. July 26, 2010. Fitch Ratings has upgraded Kazakhstan-based Alliance Bank's Long-term foreign currency Issuer Default Rating (IDR) to 'B-' from 'RD' ('Restricted Default'), and assigned a Stable Outlook. The rating action follows the completion of the restructuring of Alliance's liabilities and concludes the review of the bank's ratings initiated by Fitch on 31 March 2010. A full list of rating actions is provided at the end of this commentary, reported the press-centre of KASE.

Alliance's ratings reflect its weak asset quality, negative equity under IFRS, the challenges of refocusing the bank's business, weak revenue generation, still heavy reliance on wholesale funding and the absence of any track record following the completion of its debt restructuring. However, the ratings also consider the benefits of government control of the bank, including the potential for moderate further government support, in case of need.

As of 1 April 2010, Alliance's asset quality was poor, with impairment reserves equal to about 70% of the loan book. The bank has established an internal division of its loan book into 'good' and 'bad' portfolios, with the latter, comprising 77% of the book at end-Q110, including all loans showing signs of impairment or having some potentially problematic features. Fitch does not rule out the possibility that the bank is over-provisioned, and recoveries may ultimately exceed those suggested by current reserve levels; however, this is a medium- term prospect. In particular, Fitch notes that a substantial number of borrowers in the 'bad' portfolio are subject to criminal investigations and legal proceedings involving the bank's former owners and management.

Although following restructuring Alliance is in compliance with Kazakh regulatory capital requirements, reported equity under end-Q110 management IFRS accounts was negative. This is explained by the fact that KZT111bn of preference shares held by government agency Samruk-Kazyna and the bank's restructured creditors are accounted for as liabilities, rather than equity, under IFRS. Achieving sustained internal capital generation will be one of the bank's most critical and potentially difficult challenges, especially given what Fitch expects to be only weakly positive recurring pre-impairment profit in 2010. Bottom line performance will, to a significant degree, be impacted by loan recoveries and impairment charges.

Although Alliance's funding structure has stabilised after restructuring, re-shaping and improving the quality of its funding will pose a challenge, as competition for depositors intensifies and the bank is covenanted not to raise new wholesale funding in the medium term. Fitch does not rule out the possibility that the bank may benefit from additional Kazakh state funding, in addition to funds already provided by Samruk-Kazyna and the Development Bank of Kazakhstan ('BBB- /Stable). Positive structural maturity mismatches and less burdensome repayments in H210 support liquidity in the short term.

Fitch incorporates into Alliance's ratings a moderate probability that support would be provided to the bank by the Kazakh government in case of need. However, Alliance's ratings also reflect Fitch's view that the bank does not represent a strategic investment for Samruk-Kazyna, and Fitch's expectation that potential state support is likely to diminish as the government proceeds with the planned sale of the bank in the medium term. A sale of the bank would lead Fitch to review the IDRs.

Alliance's credit profile could benefit from evidence of greater financial sustainability following restructuring, including through restoration of the capital base, improvement in performance and greater funding base diversification. However, a withdrawal of government funding support or further unreserved loan losses, if incurred, could put downward pressure on the ratings.

Alliance is now the 6th largest bank in Kazakhstan. The bank defaulted in 2009 due mainly to a high level of bad loans, and following restructuring is now controlled by government-owned National Welfare Fund Samruk-Kazyna (67% of both common and preferred shares), with the other 33% held by creditors affected by the restructuring.

The rating actions are as follows:

Long-term foreign currency IDR: upgraded to 'B-' from 'RD'; Outlook Stable
Long-term local currency IDR: assigned at 'B-'; Outlook Stable
Short-term foreign currency IDR: upgraded to 'B' from 'RD';
Individual Rating: upgraded to 'E' from 'F'
Support Rating: affirmed at '5';
Support Rating Floor: affirmed at 'No Floor'
Senior unsecured debt: upgraded to 'B-' from 'C'; Recovery Rating is 'RR4'
Subordinated debt: assigned at 'CC'; Recovery Rating is 'RR6.