Fitch Downgrades Alliance Bank's Individual Rtg to 'D/E'; Affirms IDR at BB-' with Negative Outlook

/Fitch Ratings, London/Moscow, July 03, 08/ - Fitch Ratings has today downgraded Alliance Bank's (Alliance) Individual rating to 'D/E' from 'D' and affirmed its other ratings at Long-term Issuer Default (IDR) 'BB-' (BB minus) with Negative Outlook, Short-term IDR 'B', Support '3' and Support Rating Floor 'BB-' (BB minus). The downgrade of the Individual rating reflects the ongoing sharp deterioration in asset quality, continued deposit outflow and severe funding constraints which are limiting overall financial flexibility, coupled with uncertainty as to the sustainability of Alliance's franchise and its future business model. At the same time, the rating is supported by the still sizeable loss-absorption capacity offered by high capital ratios. However, continued asset quality deterioration and deposit outflow could result in further downward pressure on the rating. Asset quality has deteriorated sharply since mid-2007, with the retail portfolio being the major source of non-performing loans (NPLs), reflecting weaknesses in underwriting and collections. The share of loans overdue by more than 90 days was a high 8.6% at end-Q108 (up from 3.5% at end-H107), while almost 25% of gross loans were in arrears at the same date. Judging from data under the National GAAP, impairment in collectively assessed retail loans (about 26% of the current loan book) worsened further in April-May, although this seemed to be balanced by a small reduction in overdue loans in the individually assessed portfolio. Fitch anticipates Alliance will have to significantly ratchet up loan loss provisions in 2008, which will result in negative pressure on profitability and, ultimately, capital. However, its Basel I tier I capital ratio was a high 17% at end-2007 and it also had good pre-impairment profitability. Fitch estimates that, given certain simplifying assumptions (zero growth in 2008 with pre-impairment profit equal to that in 2007 and no capital injections or distributions) Alliance could take a provision charge on its 2008 income statement equal to 17.2% of end-2007 gross loans before the Basel I tier I capital ratio falls below 10%. Alliance has successfully repaid large foreign borrowings (nearly USD1.2bn or 14% of end-2007 liabilities) falling due in H108, but has not been able to attract new international borrowings nor arrest the continuous deposit outflow. The latter has continued despite moderate sector growth in deposits since October 2007 and the bank offering some of the highest rates in the market. As a result, the bank has had to ratchet down its lending operations and decided to completely wind down its cash-based consumer lending business, which had formerly been a major contributor to performance and a core part of the business model. Total assets shrunk 18% as at end-May 2008 from end-July 2007, while retail deposits dropped about 36%. Facing severe funding constraints, Alliance has had to rely on its operating profit and loan portfolio repayments as almost the only sources of incremental liquidity. Thanks to the short-term nature of its consumer loan book, Alliance had managed to maintain a satisfactory level of liquid assets at end-May 2008 and, Fitch believes, the size of the liquidity cushion should not have fallen to a critical level even after the large repayments in June (nearly USD0.5bn). However, with falling profits and moderating repayments in its loan portfolio, any acceleration in deposit outflow could result in external liquidity support being required to remain in compliance with prudential regulations and some loan covenants. Alliance's IDRs and Support rating reflect the moderate probability that support would be forthcoming from the Kazakhstani authorities in case of need, given the bank's still significant domestic franchise. The Negative Outlook reflects that on the Kazakh sovereign ratings (local currency 'BBB+', foreign currency 'BBB'). At the same time, the importance of Alliance for the local banking system is reducing, with the share in system retail deposits plummeting to 5.4% at end-May 2008 from 9.2% at end-June 2007, and Fitch hence sees additional downside risk for the bank's Long-term IDR given the potentially reduced propensity of the sovereign to support a less systemically important bank. Alliance is controlled by Seimar Alliance Financial Corporation (SAFC), which in turn is owned by three brothers. Fitch has been informed that SAFC is looking into the possibility of selling up to 51% in the bank to a strategic investor. Contact: James Watson Alexei Kechko Tel: + 7 495 956 99 01 Media relations: Alla Izmailova, Moscow Tel: +7 495 956 9903 Hannah Warrington, London Tel: +44 (0) 207 417 6298 [2008-07-04]