OREANDA-NEWS. January 27, 2011. Standard & Poor's Ratings Services said it revised its outlooks on Kazakhstan-based Kazkommertsbank (JSC) (KKB), JSC Nurbank, and JSC AsiaCredit Bank to stable from negative. At the same time, the long- and short-term counterparty credit ratings on the banks were affirmed. We also assigned our 'kzBB+' Kazakhstan national  scale rating to Nurbank, reported the press-centre of KASE.

The rating affirmations affect:

- The 'B/C' long- and short-term counterparty credit ratings on KKB and Nurbank;

- The 'B/B' long- and short-term counterparty credit ratings on AsiaCredit Bank.

The outlook revisions reflect our view of the robust economic recovery in the Republic of Kazakhstan (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Kazakhstan national scale rating 'kzAAA'). We expect GDP growth to average 7% between 2011 and 2013, underpinned by structural net inflows from foreign direct investment and the prospect of a doubling of oil output by 2020 (see "Republic of Kazakhstan FC And LC Long-Term Ratings Raised By One Notch To 'BBB' And 'BBB+'; Outlook Remains Stable," published on Dec. 23, 2010).

The rating actions also reflect our opinion that the banking operating environment in Kazakhstan has stabilized following the restructuring in 2010 of three of the four defaulted banks. The pressure on Kazakh banks' asset quality, liquidity, and profitability has, in our view, eased, following a period of heightened risks over the past three years.

In the short to medium term, we expect ongoing improvements in asset quality because we believe that the deterioration bottomed out in 2010. We also expect to see the three banks maintain adequate liquidity to meet wholesale debt repayments and customer deposit withdrawals, especially from government-related entities, and adequate capitalization to mitigate the high-risk economic and banking environment in Kazakhstan. In January 2011, we assigned a preliminary Banking Industry Country Risk Assessment (BICRA) score of 9 to Kazakhstan's banking industry (see "Preliminary Banking Industry Country Risk Assessments In 23 Countries," published on Jan. 6, 2011). A BICRA signals our view of the relative riskiness of a country's banking industry on a scale of 1 to 10, ranging from the lowest-risk banking industries (group 1) to the highest-risk banking industries (group 10).

The ratings on the three banks are based on our assessment of their stand-alone credit profiles and we do not currently apply any uplift for extraordinary parental or government support to these banks.

JSC Kazkommertsbank

The rating actions on KKB reflect our belief that KKB will continue to benefit from state support, given its high systemic importance according to our classification. They also reflect our view of KKB's cautious and fairly efficient business and operational adjustments and its efforts to reduce leverage, which have helped it adapt to the challenging operating environment.

The ratings on KKB reflect KKB's weak asset quality, high dependence on foreign debt, limited capitalization, and high single-name concentrations in corporate loans and deposits. On the other hand, KKB has a good market position, particularly among large Kazakh corporate clients, and adequate core revenue generation, supported by aggressive cost management.

KKB is one of the largest banks in Kazakhstan, with total assets of Kazakhstani tenge (KZT) 2.7 trillion (about \\$17.5 billion) on Sept. 30, 2010. As of this date, KKB also accounted for 21% of the system's assets, 25% of loans, 19% of retail deposits, and 22% of corporate deposits.

In May 2009, the Kazakh government acquired a 21% stake in KKB through a capital injection of KZT36 billion, but we understand it intends to exit KKB when market conditions improve. Direct state funding accounts for slightly less than 10% of KKB's liabilities, but we estimate that about 40% of KKB's deposits relate to state companies.

We expect the proportion of loans under stress, including restructured loans, to reduce only moderately in 2011 from almost 48% on Sept. 30, 2010. This will continue to hurt KKB's capitalization and financial performance. Wholesale debt repayments of about USD million due in 2011 and significant deposit concentrations will continue to challenge the bank's liquidity management, in our view.

JSC Nurbank

The rating actions on Nurbank reflect our view that the bank has addressed its credit reserving needs through increased credit provisions at midyear 2010, in conjunction with a capital injection at year-end 2010.

The ratings reflect our view of Nurbank's weak asset quality, high concentrations in lending and funding, and sizable exposure to the troubled construction and real estate sectors. These negative factors are partly offset by the bank's increased capitalization and credit reserves, strengthened management team since the beginning of 2010, and adequate liquidity management.

The level of reported nonperforming loans (NPLs; 90 days overdue) decreased in 2010 (8.9% at midyear 2010). However, we believe the proportion of loans under stress, including restructured loans, is closer to 40%. Loan loss provisions of 23.4% of total loans at midyear 2010 are adequate, in our view, following a significant increase. We expect earnings to slowly recover from 2011 onward, after a material loss in the first half at 2010, as revenues pick up and credit costs normalize.

A capital increase of KZT95.5 billion (about USD million) in December 2010 by the new shareholder to cover provision-related losses should have markedly strengthened Nurbank's adjusted total equity-to-adjusted assets ratio to more than 30% at year-end 2010. However, the ratio could have been undermined by potential additional provisioning needs and high concentrations.

Nurbank's balance-sheet liquidity and funding profile are comfortable, in our view. Due to recent substantial foreign debt repayments and deposit growth, the share of foreign debt in the bank's total liabilities declined to about 9.4% at midyear 2010, which is below the sector average. However, large deposit and loan concentrations remain, increasing roll-over risk.

JSC AsiaCredit Bank

The rating actions on AsiaCredit Bank reflect its decision to increase capital by USD 100 million in 2010-2011 and our view of a positive trend in asset quality.

The ratings on AsiaCredit Bank reflect the bank's small domestic franchise, weak asset quality and profitability, and aggressive growth plans. The ratings benefit from our view of AsiaCredit Bank's strong capitalization, enhanced by a proposed large capital increase and good short-term liquidity.

AsiaCredit Bank is a small Kazakh commercial bank with a market share of about 0.1% by total assets. In our view, AsiaCredit Bank's small capital base in absolute terms-KZT6.1 billion (about USD 40 million) on Sept. 30, 2010--leaves it vulnerable to external shocks and the changing fortunes of its largest customers.
 
The bank's controlling shareholders - Kazakh businessmen Nurbol Sultan and Chingiz Dosmuhambetov - plan to contribute USD 100 million (about KZT15 billion) in capital in 2010-2011 to increase capitalization to the minimum regulatory requirement and support the bank's medium-term growth strategy. The bank received KZT7.4 billion from Mr. Sultan in September 2010, which is currently registered as a deposit. This should result in a markedly stronger risk-adjusted capital (RAC) ratio than the 18.9% after adjustments we had calculated as of year-end 2009, which was the highest among rated banks in Kazakhstan.

In our view, AsiaCredit Bank's asset quality is improving. Reported NPLs (90 days overdue, including restructured and written-off loans) fell to 10.8% on Sept. 30, 2010, from 13% at year-end 2009. We believe this is largely due to the bank's more-conservative growth rates than peers' during the mid-2000s. Exposure to the construction and real estate sectors (41% of total loans, including residential mortgages on Sept. 30, 2010) heightens credit risk.

We regard AsiaCredit Bank's funding and liquidity position as adequate, reflected in an acceptable loan-to-deposit ratio of 117% as of Sept. 30, 2010, and no outstanding foreign debt repayments.