Fitch Affirms Kazakh Policy Banks' Ratings
KEY RATING DRIVERS
Both banks' ratings reflect Fitch's opinion of the high probability of support from the government of Kazakhstan (BBB+/A-/Stable), if needed. This view is based on the banks' (i) 100% ultimate sovereign ownership; (ii) important policy roles and limited scope of non-policy operations; (iii) moderate cost of support that might be required to each of the institutions relative to sovereign financial resources; (iv) potential adverse economic or social consequences of a failure by the authorities to support the banks; and (v) a track record of state funding and equity injections to support the banks' expansion.
The one-notch differential between the sovereign and the banks' IDRs reflects the risks stemming from (i) an indirect government ownership of the rated institutions through JSC National Management Holding Baiterek (BBB+/A- /Stable), whose own financial resources are limited, meaning potential support may be delayed in a stress scenario; (ii) the somewhat loose government supervision of these banks' operations as none of the government officials sits on the banks' boards of directors, while DBK is also exempt from regulatory oversight from the National Bank of Kazakhstan (NBK); and (iii) moderate risk that the sovereign could cease providing full support to all quasi-sovereign entities before defaulting on its own obligations, given the sizable debt of quasi-sovereigns relative to that of the sovereign. In DBK's case the Long-term IDRs further factor in a significant share of wholesale third-party debt and high-risk exposures, meaning potentially high probability of DBK requiring support.
Fitch believes the plans to privatise HCSBK will not affect the state support propensity, because the government intends to (i) maintain a controlling stake in the bank; and (ii) maintain its primary social objective of developing a house savings and mortgages system in Kazakhstan. Fitch has not assigned a Long-term foreign currency IDR to HCSBK due to less than material foreign currency operations.
Fitch has not assigned Viability Ratings to the banks due to their limited non-policy operations and high reliance on government for support in realisation of their objectives.
DBK
The cost of supporting DBK for the government, if needed, is currently modest even allowing for potential considerable growth. DBK's third-party wholesale obligations were equal to a moderate 3% of 2015F's GDP or 6% of official international reserves at end-1H15, while 31% of the bank's funding was guaranteed by the JSC Sovereign Wealth Fund Samruk-Kazyna (BBB+/A-/Stable).
Furthermore, the bank's liquidity benefits from the large size of highly liquid assets (mostly cash with NBK), absence of on-demand liabilities and onerous covenants, limited near-term repayments and track record of consistent access to government funding. At end-3Q15 liquid assets were 3x total wholesale debt repayments due in the next 12 months. Liquid assets, net of these repayments, made up 15% of remaining third-party liabilities. At end-3Q15, leverage (defined as debt-to-equity ratio) was within the levels, covenanted in DBK's funding agreements.
DBK's capitalisation is moderate in light of the high-risk nature of its development projects, elevated concentrations and limited internal capital generation. The Fitch Core Capital (FCC)/ risk-weighted assets ratio and Basel II (standardised approach) Tier I ratios, both at 19% at end-1H15 and helped by equity injections in 2013-2014, may have decreased by about 5ppts as a result of the recent tenge devaluation and related increase in risk-weighted assets.
Non-performing loans (NPLs) stood at 5% of gross loans and restructured loans made up a further 6% at end-1H15. These were moderately provisioned as loan impairment reserves comprised 44% of total NPLs and restructured loans and the unreserved part made up 20% of FCC.
Furthermore some of the technically performing large exposures are a risk, including unsecured loans to subsidiaries of a distressed privately-owned Kazakh metals and mining company (50% of FCC at end-1H15) and an unguaranteed exposure to DBK's sister company that manages problem assets purchased from DBK in 2013-2014 (10% of FCC).
Significant recent growth of DBK's unsecured interbank exposure (53% of FCC at end-1H15), which reflects its involvement in Nurly Zhol (Bright Path) economic stimulus programme, is a further risk given Kazakh banks' weak credit profiles. However, the credit risk is partially mitigated by the reasonable granularity of the exposure with only a small share of banks rated lower than 'B'.
HCSBK
The bank's capitalisation was solid at end-1H15 with an equity/ assets ratio at 25% and a FCC/ risk-weighted assets ratio at 50% (mortgages are risk-weighted 35%-100%). High capital ratios partially reflect the bank's still limited track record of operations. The loan book is also small especially relative to the sovereign resources (1% of the country's 2015F's GDP or 2% of sovereign reserves at end-1H15). However, the bank's planned several-fold growth in the medium- to long-term could require extra capital support from the government.
HCSBK's highly liquid assets (mostly sovereign bonds) were at a comfortable 50% relative to customer deposits at end-3Q15. However, further funding needs will arise for issuance of mortgages as more customers apply for them, having accumulated sufficient money on their savings accounts to make a down-payment. The savings accounts represent the majority of HSBK's funding (80% of liabilities at end-3Q15) with the remainder comprising long-term budgetary loans at below market rates.
Asset quality risks are limited given the low-risk nature of its lending. HCSBK's NPLs were at a low 0.5% of gross loans at end-1H15, reflecting a low 39% average loan-to-value (LTV) ratio propped up by large legally required down-payments from borrowers entering the state-run mortgage programmes. Moreover, below-market interest rates on currently about 40% of HCSBK's loan portfolio and substantial grace periods translate into less burdensome repayment terms for HCSBK's loans compared with domestic commercial banks.
Internal capital generation has improved with a return on average assets at 4% and return on average equity of 15% for 1H15 (both annualised). Growing efficiencies of scale would likely help the bank remain profitable as the interest margin (6% currently) is expected to shrink. However, almost all of 2015 profits may be used next year to compensate depositors for the depreciation of tenge, according to a government plan.
RATING SENSITIVITIES
Both banks' Long-term IDRs are likely to remain one notch below the sovereign's respective IDRs, and to move in tandem with them.
A marked weakening of policy roles or association with the Kazakh authorities could result in negative rating action, although neither scenario is currently expected by Fitch.
DBK's ratings could also come under downward pressure if leverage increases markedly and asset quality deteriorates sharply without adequate capital support from the authorities.
The ratings could be upgraded and equalised with the sovereign if (i) the authorities become directly involved in the management of DBK or HCSBK or (ii) if the government guarantees a large majority of DBK's funding or its capitalisation strengthens significantly.
The rating actions are as follows:
Development Bank of Kazakhstan
Long-term local currency IDR: affirmed at 'BBB+'; Outlook Stable
Short-term local currency IDR: affirmed at 'F2'
Long-term foreign currency IDR: affirmed at 'BBB'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F3'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB'
Senior unsecured debt ratings: affirmed at 'BBB'/'F3'
House Construction and Savings Bank
Long-term local currency IDR: affirmed at 'BBB+'; Outlook Stable
Short-term local currency IDR: affirmed at 'F2'
National Long-term Rating: affirmed at 'AAA(kaz)'; Outlook Stable
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB+'
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