Fitch Rating Rationale on Downgrade of Kazakhstan's Halyk Bank

/Fitch Ratings, London, Moscow, November 11, 08/ - Fitch Ratings comments today on yesterday's downgrade on the foreign currency Long- Term Issuer Default Rating (IDR) of Kazakhstan's Halyk Bank to 'BB' from BB+'. The agency also announced yesterday that it was maintaining the Negative Outlook on the rating. Halyk's Individual rating of 'C/D' was affirmed yesterday, but is now also under downward pressure. A full list of rating actions is provided at the end of this release. The downgrade of the bank's Long-term IDR reflects the reduced ability of the Kazakh authorities to provide support to the bank, as reflected in the downgrade of the sovereign ratings (see separate announcement released yesterday, 'Fitch Downgrades Seven Kazakh Financial Institutions'). The downward pressure on the Individual Rating reflects the agency's deepening concerns over asset quality as loan impairment rapidly increases and the domestic economy's growth prospects are impacted by a likely global recession, lower oil prices and a sustained near-closure of capital markets which has led to sharply lower credit growth. Impaired loans (defined as doubtful 5 and loss categories according to the standards of the local FSA) have doubled to 7.0% of the individually assessed portfolio at end-Q308 from 3.4% at end-2007, with loans more than 90 days overdue at 5.2% of the loan book. Given that around 9% of the loan book has been restructured (although with relatively conservative grace periods of up to three months), there is a risk that headline impairment ratios may understate the extent of asset quality problems. Fitch also notes that the seasoning of Halyk's portfolio started somewhat later than at other banks, as rapid loan growth continued in H207 when other banks had generally stopped expanding. Individual borrower concentrations are still relatively high. On a positive note, Halyk has a significantly smaller exposure to the real estate and construction sectors than peers BTA Bank and Kazkommertsbank (KKB). In addition, Halyk is also considerably less reliant on international funding and enjoys a broader and more stable domestic funding franchise, having enjoyed a flight to perceived quality in retail deposits during H207. In Fitch's view, these factors justify a one-notch difference, at present, between the Individual ratings of Halyk and BTA/KKB, whose Individual ratings were downgraded yesterday to 'D' from 'C/D'. Halyk's stand-alone credit profile is also supported by still sound pre-impairment profitability and reasonable liquidity. However, a significant slowdown in domestic growth, coupled with further seasoning of the portfolio, could result in further asset quality deterioration at Halyk. Fitch notes that Halyk's capital ratios are slightly tighter than its peers, meaning it has somewhat less capacity to absorb additional losses. "In light of these factors, the Individual rating is now under significant downward pressure and the expected capital injection from the government may only partially offset existing credit risks," says Alexei Kechko, Director in Fitch's Financial Institutions Group. Halyk was the third largest bank in Kazakhstan at end-Q308, with a 14.6% share of assets, and the largest by retail deposits (22.4% market share) and network. The bank is 68.7% owned by the Almex Group, whose beneficiaries are President Nursultan Nazarbayev's daughter, Dinara Kulibayeva, and son- in-law, Timur Kulibayev. Fitch has been informed that Almex' stake is likely to be diluted in the coming share issue, but remain above 50%. The National Wealth Fund Samruk-Kazyna is offering capital injections into four of the country's leading banks, including Halyk. Rating Actions: Long-term foreign currency IDR: downgraded to 'BB' from 'BB+'; Outlook remains Negative Long-term local currency IDR: downgraded to 'BB' from 'BBB-' (BBB minus); Outlook remains Negative Short-term foreign currency IDR: affirmed at 'B' Short-term local currency IDR: downgraded to 'B' from 'F3' Support rating: affirmed at '3' Individual rating: affirmed at 'C/D' Support Rating Floor: revised to 'BB' from 'BB+' Senior unsecured debt: downgraded to 'BB' from 'BB+' Contact: Alexei Kechko, James Watson, Moscow Tel: +7 495 956 9901 Media Relations: Hannah Warrington, London Tel: +44 (0) 207 417 6298 Email: hannah.warrington@fitchratings.com Alla Izmailova, Moscow Tel: +7 495 956 9903 Email: alla.izmailova@fitchratings.com [2008-11-12]