BTA Ipoteka - summary of credit rating

/Standard & Poor's, London, October 15, 04/ - On October 15 of 2004 Standard & Poor's assigned "В+/В" long-term and short-term counteragent and depository certificates ratings to BTA Ipoteka JSC (BTAI). Outlook - Stable. The ratings on BTA Ipoteka (BTAI) are based on its concentrated and wholesale funding, untested performance, fast growth and start-up nature, and the generally risky economic environment in Kazakhstan. The ratings benefit from BTAI's strong position in a lucrative niche sector, fairly good financial position given its start-up nature, and its supportive shareholder. BTAI's strategic importance to its parent, Bank TuranAlem (BTA; BB- /Positive/B) is a key positive rating factor, as is the regulatory and business environment, which is conducive to mortgage lending. Established as the 100%-owned mortgage subsidiary of BTA in 2000, BTAI holds a strong position in the fast-growing mortgage market in Kazakhstan, with a 27% share. Although managerially independent, BTAI shares some of its IT systems with BTA and relies on the bank for funding and capital support. BTA is prepared to sell stakes to foreign specialized financial institutions or multilateral agencies, but will maintain a majority stake of at least 51% in BTAI. Loans have grown very rapidly in the past three years, owing to the start-up nature of BTAI, and account for the majority of its balance sheet. In addition, BTAI retains the management and nonrepayment risk for the off-balance- sheet mortgages it sells to BTA and the Kazakh Mortgage Company (KMC). Although problematic loans are small, most are less than a year old with long-term maturity, which makes it difficult to draw conclusions regarding loan quality. Nevertheless, relatively good loan approval systems, the setting up of credit bureaus, the ease of collateral foreclosure, as well as insurance cover on credit losses, provide a degree of comfort. BTAI's very short track record implies that the recent high earnings, which were influenced by nonrecurring items, are not indicative of future profitability. Standard & Poor's believes that BTAI could be very profitable, however, given the growth potential of the mortgage market in Kazakhstan, where it has a strong position, coupled with relatively high margins, provided that it can keep its assets clean. As a non-deposit-taking entity, BTAI is entirely wholesale funded. Its main sources of funding come from long-term interbank loans as well as mortgage sales to BTA and the KMC. BTAI wants to diversify funding by issuing mortgage bonds. Although BTAI does not have to maintain regulatory capitalization ratios in line with those of banks, it needs to operate within certain covenants relating to its funding providers. BTAI's supportive parent recently increased the former's capital to Kazakhstan tenge (KZT) 1.5 billion and has not demanded any dividends. Outlook The mortgage market is projected to grow 16-fold over the next five years, presenting opportunities for all market participants, particularly BTAI, which already has a strong foothold in this market. Obtaining an 'A' listing on the Kazakhstan Stock Exchange will help fund growth as well as diversify BTAI's funding away from its parent. Future ratings will depend on the creditworthiness of BTAI's parent as well as its commitment to its subsidiary. The ratings will also hinge on maintenance of good asset quality given fast growth within an untested market, success in diversifying funding away from BTA, and generating returns to match those of BTAI's parent. [2004-10-15]