OREANDA-NEWS. Fitch Ratings has assigned Kazakhstan-based Tsesnabank Long-term foreign and local currency Issuer Default Ratings (IDRs) of 'B+' with Stable Outlooks. A full list of rating actions is at the end of this commentary.

KEY RATING DRIVERS - IDRS, VIABIITY RATING (VR), NATIONAL LONG-TERM RATING
The 'B+' Long-term IDRs are driven by Tsesnabank's standalone credit profile, as captured by its 'b+' VR. The ratings reflect the currently challenging operating environment in Kazakhstan, particularly due to the slump in oil prices and devaluation of the tenge. It also considers the bank's moderate retail franchise, tight capitalisation, high concentrations and exposure to more vulnerable economic sectors. At the same time, the ratings moderately benefit from the bank's problem loans, which are currently lower than peers, access to state-controlled entities' funding, limited wholesale market debt and reasonable profitability.

The loan book is highly concentrated, with the largest 20 loans exceeding 3.5x Fitch core capital (FCC) and the largest single loan exposure accounting for 0.5x FCC. Impaired loans are currently at moderate levels, although this partly reflects the unseasoned loan book, which tripled in 2012-2014.

Impairment reserve coverage of the loan book stood at a moderate 6% of gross loans at end-August 2015 relative to non-performing loans (overdue by more than 90 days) at 4% of gross loans, and restructured loans at a further 5%. Although currently performing, the following loans are also high risk, in Fitch's view: (i) an exposure to an agricultural group, potentially affiliated with the bank, equal to 0.2x FCC at end-1Q15; and (ii) weakly secured large real estate project financing loans equal in aggregate to 1x FCC.

Devaluation of the tenge could put further pressure on the bank's asset quality in light of a large share of foreign currency loans, at 47% of net loans at end-1H15. The bank's intention to convert some of these loans into local currency at post-devaluation exchange rates would eliminate future FX risk, but lock in higher leverage at the borrower companies.

Capitalisation is a constraining factor for the ratings given the relatively low capital ratios, material risky exposures, and some uncertainty about the sources of previous equity injections. The FCC/ risk-weighted assets ratio stood at a moderate 8.6% at end-1H15 and could have fallen by about 1ppt in 3Q15 as a result of the devaluation. The Tier I and total regulatory ratios dropped to 8.5% and 11.9% at end-August 2015 from 9.2% and 13.2%, respectively, at end-July 2015, as the tenge lost about 30% of its value.

The bank's annualised pre-impairment profit (net of accrued, but not received, interest income and forex gains) equalled a moderate 3% of average loans in 1H15 (4% in 2014). The annualised internal capital generation was a reasonable 14% in 1H15 (15% in 2014).

The funding position was relatively comfortable at end-August 2015, mostly due to access to long-term funding from Kazakh quasi-sovereign entities (about 20% of liabilities), state-controlled companies' deposits (a further 20%) and subordinated and senior local bonds held predominantly by the State Pension Fund (a further 10%). Third-party wholesale debt is currently insignificant, whilst borrowing plans are moderate.

Highly liquid assets (cash, short-term interbank placements and repoable debt securities) amounted to a relatively tight 13% of customer deposits at end-August 2015. Although relating mostly to the quasi-state entity placements, debt amounts maturing by end-2015 were sizeable (40% of highly-liquid assets). Refinancing might prove challenging in light of the state authorities' intention to scale down funding programmes for the banking sector.

KEY RATING DRIVERS - DEBT RATINGS
The bank's 'B+' senior unsecured debt rating is equalised with its local currency IDR, and the 'B' subordinated debt rating is notched down by one notch from the IDR due to higher loss severity.

KEY RATING DRIVERS - SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
The bank's '5' SR and 'No Floor' SRF reflect Fitch's expectations that extraordinary support for Tsesnabank cannot be relied upon given its relatively modest 6% share of retail deposits. The bank does not currently qualify as a domestic systemically important bank (DSIB) under the regulatory definition.

RATING SENSITIVITIES
IDRS, VR, NATIONAL LONG-TERM RATING, DEBT RATINGS
The ratings could be downgraded if asset quality metrics deteriorate materially from the current levels and/or if capitalisation weakens. The ratings could also come under pressure in connection with any potential weakening of the bank's access to government-related funding sources.

An upgrade would require concentration risks to reduce and a longer track record of sustainable performance, underpinned by continued reasonable asset quality metrics.

Any changes in the bank's IDRs would likely be matched by changes in its debt ratings.

SR AND SRF
The bank's SR could be upgraded if the bank is acquired by a stronger financial institution (not our base-case expectation at the moment). The SRF could be also revised upwards by one notch should Tsesnabank acquire a substantially larger market share or qualify as a domestic DSIB.]

The rating actions are as follows:
Long-term foreign currency IDR: assigned at 'B+', Outlook Stable
Short-term foreign currency IDR: assigned at 'B'
Long-term local currency IDR: assigned at 'B+', Outlook Stable
Short-term local currency IDR: assigned at 'B'
Viability Rating: assigned at 'b+'
National Long-term rating: assigned at 'BBB-(kaz)', Outlook Stable
Support Rating: assigned at '5'
Support Rating Floor: assigned at 'No Floor'
Senior unsecured debt rating: assigned at 'B+', Recovery Rating 'RR4'
Subordinated debt rating: assigned at 'B', Recovery Rating 'RR5'.