OREANDA-NEWS. July 11, 2011. Standard & Poor's Ratings Services said that it assigned its 'BBB' long-term and 'A-3' short-term counterparty credit ratings to Kazakhstan-based HSBC Bank Kazakhstan JSC (HSBC/Kz). At the same time, we assigned a 'kzAA+' Kazakh national scale rating to the bank. The outlook is stable, reported the press-centre of KASE.

The ratings on HSBC/Kz reflect our view of its strong brand name and group franchise, high integration and brand association with the HSBC group, and substantial support from its strong and supportive parent. They also reflect the bank's strong underwriting standards and niche strategy that focuses on large blue-chip companies, which provide good asset quality despite the risky operating environment, and cheaper and more stable deposit funding compared with domestic peers.

Offsetting factors are the high-risk economic and banking environment in the Republic of Kazakhstan (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; National Scale Rating kzAAA/--/-), the bank's small absolute size, which makes it vulnerable to external shocks, and high single borrower and depositor concentrations. The ratings are also constrained by limited business and geographic diversification and moderate capitalization owing to the risky operating environment and its planned ambitious medium-term expansion.

Wholly owned by HSBC Bank PLC (AA/Stable/A-1+), Standard & Poor's classifies HSBC/Kz as a "strategically important" subsidiary. The long-term rating  therefore benefits from a three-notch uplift from its stand-alone credit profile to reflect expected extraordinary parent support in case of need. The bank is closely integrated within the HSBC group in terms of culture, commercial development, business practices, risk management, liquidity practices, and systems. In addition, HSBC/Kz benefits from group funding and group guarantees on all large credits that exceed the regulatory single-borrower limit.

HSBC/Kz's asset quality appears stronger than domestic peers' (with nonperforming loans, over 90 days delinquent, of 4.4% among the commercial loan portfolio and a moderate amount of restructured loans at year-end 2010). We believe this is partly due to the bank growing its loan portfolio after the onset of the financial crisis, thus avoiding the heavy impact on asset quality  that affected other Kazakh banks. This is also due to its strong underwriting standards, low exposure to troubled sectors such as real estate and construction, and focus on large blue- chip companies that operate in strategic sectors of Kazakhstan. Liquidity is satisfactory and well managed, benefiting from group membership.

Profitability has been volatile, which in our view reflects cyclical swings in credit cost as well as the bank's start-up phase and fast growth strategy. HSBC/Kz benefits from strong interest margins due to its cheaper cost of funding compared with domestic peers and also because of the confidence of its depositor base based on its brand. Excess cash in its nostro account constrains interest margins, but also presents the opportunity to boost earnings through future credit growth.

Capitalization is considered moderate in view of the risky Kazakh operating environment and the bank's planned ambitious medium-term expansion, although it benefits from the bank's strong parent. Moderate capitalization is also reflected in Standard & Poor's risk-adjusted capital ratio of 5.5% before diversification (3.6% after concentration adjustment). The high-risk operating environment in Kazakhstan and high single-borrower concentrations also constrain the bank's capitalization.

The stable outlook reflects that on the sovereign. It also reflects our view that the bank will successfully roll out its focused and balanced local growth strategy without changing its risk appetite and our expectation that it will remain strategically important for its parent. We expect HSBC/Kz's earnings and capitalization prospects to improve going forward owing to the strengthening economic environment. However, the potential for an upgrade in the next 18 months is limited, at least until domestic market pressure eases considerably. Reduction in single-name concentrations and stronger capital policy could be positive for the rating.

Over time, the ratings could benefit from the successful roll out of its growth strategy, resulting in enhanced profitability and sustained adequate financial performance, without changing its risk appetite. A sovereign upgrade would not automatically lead to an upgrade of HSBC/Kz.

Significant deterioration in the operating environment could put pressure on the ratings. The ratings would also come under pressure if asset quality indicators showed material deterioration, if execution and implementation of its growth strategy were poorly managed, or the bank grew ahead of its risk appetite. A sovereign downgrade could also result in a similar rating action on HSBC/Kz.