Fitch affirms BTA Bank's ratings; highlights downward pressure on individual rating

/Fitch Ratings, London/Moscow, July 03, 08/ - Fitch Ratings has today affirmed Kazakhstan-based BTA Bank's (BTA) ratings at foreign currency Long-term Issuer Default rating (IDR) 'BB+', foreign currency Short-term IDR B', local currency Long-term IDR 'BBB-' (BBB minus), Short-term local currency IDR 'F3', Individual 'C/D', Support '3' and Support Rating Floor BB+'. The Outlook on the both Long-term IDRs remains Negative. BTA's Long-term and Short-term 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 substantial domestic franchise. The Negative Outlooks on the Long-term IDRs reflect those on the ratings of the Kazakh sovereign (local currency 'BBB+', foreign currency 'BBB'). Although affirmed at present, BTA's Individual rating is now under significant downward pressure. This reflects the ongoing increase in loan impairment levels and generally heightened level of credit risk currently faced by the bank, as a result of high construction sector and individual borrower concentrations in a tough credit environment. In addition, Fitch is concerned about still weak corporate governance, considerably increased exposure to higher risk real estate projects in Russia and a potentially marked increase in related party lending. Reliance on external funding is also high, although near-term refinancing risk is moderate, in Fitch's view, and liquidity is currently adequate. The rating also considers BTA's strong franchise and sound pre-impairment performance to date. Fitch is also concerned by ongoing deficiencies in the data supplied by BTA to Fitch, with the most critical data on asset quality being not always being reliable, in the agency's view, and not up-to-date. According to the publicly available data provided to the local regulator, the share of Doubtful 5 and Loss categories (which should capture most loans overdue by 60 days or more) in individually assessed gross loans (on an unconsolidated basis) jumped from 1.2% at end-2007 to 4.6% at end-May 2008, while the share of Doubtful 2,4,5 and Loss categories in individually assessed loans rose from 1.6% to 8% over the same period. The latter indicator is the best proxy for all loans overdue by more than 7 days and a sharp spike may suggest a likely further increase in the proportion of deeply impaired loans in the future. In addition, Fitch notes that BTA tends to be somewhat less conservative than some other Kazakh banks in its regulatory classification of loans. Fitch also notes the very rapid increase in BTA's exposure to the Russian construction and real estate sector since 2006, and in particular during 2007 when total exposure to CIS and other non-OECD borrowers grew 2.5x to 1.7x equity. Most of the Russian construction/real estate lending is collateral- driven and to projects at an early stage of development. Although diversification outside Kazakhstan appears to be beneficial for BTA in the current environment, its enhanced focus on an intrinsically cyclical and typically highly leveraged sector is negative for the bank's credit profile in the longer-term. Fitch also believes that a considerable portion of new loans in Russia may be to companies affiliated with BTA's current shareholders, although the share of related party business is impossible to identify properly given the bank's untransparent shareholder structure and inadequate disclosure on ownership of borrowers. At the same time, BTA's Basel I Tier I capital adequacy ratio stood at a relatively high 16.9% at end-2007. Fitch estimates that, given certain simplifying assumptions (zero growth in 2008; 2008 pre-impairment profit equal to that in 2007; no capital injections or distributions in 2008), BTA could take a provision charge through its 2008 income statement equal to 13.4% of end-2007 gross loans before the Basel I tier I capital ratio fell below 10%. This represents significant loss absorption capacity, in the agency's view, and the currently relatively strong capitalisation is a key factor supporting BTA's Individual rating at present, notwithstanding asset quality and corporate governance concerns. BTA is one of the two largest banks in Kazakhstan, with top three positions in all major market segments. It has also developed a network of affiliate banks in other CIS countries and acquired a minority stake in Turkey's Sekerbank. BTA'a shareholder structure is not transparent, but Fitch understands that the bank is controlled by a number of Kazakhstani investors. 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 [2008-07-08]