03.02.2016, 16:02
S&P affirms Nurbank credit ratings at "В/В", revises outlook from Stable to Negative
OREANDA-NEWS. Standard & Poor's Ratings Services said today that it had revised its outlook on Kazakhstan- based Nurbank JSC to negative from stable. The 'B/B' long- and short-term counterparty credit ratings were affirmed.
We also lowered our long-term Kazakhstan national scale rating on Nurbank to 'kzBB' from 'kzBB+'.
The outlook revision stems from our expectation that Nurbank's deteriorating capitalization, combined with negative trends in Kazakhstan's economy and banking sector, will put further pressure on the bank's creditworthiness over the next 12 months.
We now regard the bank's capitalization as moderate rather than adequate, due to low expected earnings capacity. In our view, Nurbank will be unable to build up capital in 2016 without equity injections, taking into account growth of risk-weighted assets. Nevertheless, both moderate and adequate capital and earnings are neutral rating factors for a bank with a 'bb-' anchor, which starts our rating analysis of banks in Kazakhstan.
Our RAC ratio for Nurbank was 6.9% at year-end 2014, and we estimate it will decrease to approximately 5.8%-6.4% in 2015-2016 in the absence of shareholder capital injections. The bank's capitalization is being eroded by depreciation of the Kazakhstani tenge, because the share of foreign-currency denominated assets is increasing due to the exchange rate, whereas capital is denominated in tenge. Positively, net of the devaluation effect, we assess the bank's growth strategy to be reasonable under the difficult economic conditions.
Our forecast for Nurbank in 2016 reflects the following base-case assumptions:
- Loan growth of about 7%, net of devaluation effects.
- No known shareholder capital injections.
- Low earnings contribution to the capital base, with the return on assets
- (ROA) at about 0.2%.
- Cost of risk at about 2%, although this could be higher. Nurbank has sufficient provisions to cover overdue loans, but we note that restructured loans form about half of the loan book and total provisions cover only 27% of total loans.
We consider that Nurbank's profitability has historically been poor and we expect it will be low in 2016. In the first 11 months of 2015, Nurbank achieved a low ROA of 0.35% and a return on equity of 2.6%, according to our estimates. We expect a lower net interest margin in 2016 than in 2015, due to the continuing lack of tenge liquidity, which is pushing up funding costs. In our view, Nurbank's preprovisioning earnings will be insufficient in the event of a sudden rise in credit costs; for example, if the economic environment deteriorates further or underwriting standards weaken in the retail segment.
The bank's exposure to the construction and real estate sectors was reportedly 26% of total loans as of Sept. 1, 2015, which is in line with the industry average. This represents a decline from 39% as of June 1, 2012, following the sale of problem loans in this segment to third-party collectors and transfers to a special-purpose vehicle. However, the share is still high and weighs on the RAC ratio.
The negative outlook indicates that we might lower the ratings over the next 12 months if weakening capitalization and negative trends in Kazakhstan's economy and banking sector erode Nurbank's creditworthiness. It also reflects our expectation that Nurbank may face difficulties in developing new business and generating sufficient stable revenues to maintain capital over that period.
We could lower the ratings if we saw significantly higher industry risks for banks in Kazakhstan or if Nurbank's nonperforming loans started increasing, especially if the increase exceeded that of peers and stemmed from loans granted after 2011. Likewise, a further reduction of Nurbank's loss-absorption capacity, due, for example, to higher provisioning expenses than we currently assume; or material one-time charges that reduce our projected RAC ratio to below 5%, would lead to a downgrade.
We could revise the outlook to stable if the bank is able to improve its capitalization to adequate levels, according to our methodology. This is after taking into account forecast growth of the bank's risk-weighted assets, including devaluation and organic growth, and its internal capital generation over the next two years, subject to our view of negative trends in the Kazakh banking industry at that time.
We also lowered our long-term Kazakhstan national scale rating on Nurbank to 'kzBB' from 'kzBB+'.
The outlook revision stems from our expectation that Nurbank's deteriorating capitalization, combined with negative trends in Kazakhstan's economy and banking sector, will put further pressure on the bank's creditworthiness over the next 12 months.
We now regard the bank's capitalization as moderate rather than adequate, due to low expected earnings capacity. In our view, Nurbank will be unable to build up capital in 2016 without equity injections, taking into account growth of risk-weighted assets. Nevertheless, both moderate and adequate capital and earnings are neutral rating factors for a bank with a 'bb-' anchor, which starts our rating analysis of banks in Kazakhstan.
Our RAC ratio for Nurbank was 6.9% at year-end 2014, and we estimate it will decrease to approximately 5.8%-6.4% in 2015-2016 in the absence of shareholder capital injections. The bank's capitalization is being eroded by depreciation of the Kazakhstani tenge, because the share of foreign-currency denominated assets is increasing due to the exchange rate, whereas capital is denominated in tenge. Positively, net of the devaluation effect, we assess the bank's growth strategy to be reasonable under the difficult economic conditions.
Our forecast for Nurbank in 2016 reflects the following base-case assumptions:
- Loan growth of about 7%, net of devaluation effects.
- No known shareholder capital injections.
- Low earnings contribution to the capital base, with the return on assets
- (ROA) at about 0.2%.
- Cost of risk at about 2%, although this could be higher. Nurbank has sufficient provisions to cover overdue loans, but we note that restructured loans form about half of the loan book and total provisions cover only 27% of total loans.
We consider that Nurbank's profitability has historically been poor and we expect it will be low in 2016. In the first 11 months of 2015, Nurbank achieved a low ROA of 0.35% and a return on equity of 2.6%, according to our estimates. We expect a lower net interest margin in 2016 than in 2015, due to the continuing lack of tenge liquidity, which is pushing up funding costs. In our view, Nurbank's preprovisioning earnings will be insufficient in the event of a sudden rise in credit costs; for example, if the economic environment deteriorates further or underwriting standards weaken in the retail segment.
The bank's exposure to the construction and real estate sectors was reportedly 26% of total loans as of Sept. 1, 2015, which is in line with the industry average. This represents a decline from 39% as of June 1, 2012, following the sale of problem loans in this segment to third-party collectors and transfers to a special-purpose vehicle. However, the share is still high and weighs on the RAC ratio.
The negative outlook indicates that we might lower the ratings over the next 12 months if weakening capitalization and negative trends in Kazakhstan's economy and banking sector erode Nurbank's creditworthiness. It also reflects our expectation that Nurbank may face difficulties in developing new business and generating sufficient stable revenues to maintain capital over that period.
We could lower the ratings if we saw significantly higher industry risks for banks in Kazakhstan or if Nurbank's nonperforming loans started increasing, especially if the increase exceeded that of peers and stemmed from loans granted after 2011. Likewise, a further reduction of Nurbank's loss-absorption capacity, due, for example, to higher provisioning expenses than we currently assume; or material one-time charges that reduce our projected RAC ratio to below 5%, would lead to a downgrade.
We could revise the outlook to stable if the bank is able to improve its capitalization to adequate levels, according to our methodology. This is after taking into account forecast growth of the bank's risk-weighted assets, including devaluation and organic growth, and its internal capital generation over the next two years, subject to our view of negative trends in the Kazakh banking industry at that time.
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