Fitch upgraded Kazkommertsbank (Kazakhstan) subordinated debt rating due to criteria change

/Fitch Ratings, Moscow, February 20, 13, Fitch Ratings English translation, KASE headline/ – Fitch Ratings has upgraded the subordinated debt ratings of Kazakhstan's Kazkommertsbank (KKB, 'B'/Stable/'b') to 'B-'/RR5 from 'CCC'/RR6, JSC Russian Standard Bank's (RSB, 'B+'/Stable/'b+') to 'B'/RR5 from 'B-'/RR6, and of Russia's Locko-bank ('B+'/Stable/'b+') to 'B(EXP)'/RR5 from 'B- (EXP)'/RR6. Ukraine-based JSC The State Export-Import Bank of Ukraine's (Ukreximbank) (Ukrexim, 'B'/Stable/'b') subordinated debt rating has been affirmed at 'CCC', and the Recovery Rating on this instrument revised to 'RR5' from 'RR6'. All these banks' other ratings were unaffected by the current rating actions. RATING ACTION RATIONALE AND DRIVERS The rating actions follow the publication in December 2012 of Fitch's revised criteria 'Assessing and Rating Bank Subordinated and Hybrid Securities'. According to this criteria, for gone concern securities that are only supposed to absorb losses upon failure/at the point of non-viability, the base case notching will be one below an issuer's Viability Rating (VR) throughout the rating scale. As Fitch views KKB, RSB and Locko's subordinated debt issues as gone concern securities (i.e. designed to absorb losses only at the point of failure), these are now notched once off the banks' VRs. Ukrexim's subordinated debt rating remains two notches below the bank's VR because of additional non- performance risk due to potential coupon deferral before the point of non- viability. Fitch's old methodology for rating subordinated debt of issuers rated 'B+' or lower involved conducting a bespoke break-up analysis of the bank's balance sheet upon default. This analysis typcially resulted in forecasted recoveries of zero for subordinated debt, resulting in the assignment of an 'RR6' Recovery Rating and a debt rating two notches below the bank's VR. The revised methodology acknowledges that banks are often not broken up (liquidated) upon default and that in most (although not all) cases holders of subordinated debt receive some level of recoveries when a bank is resolved. The revision of all four banks' securities' Recovery Ratings to 'RR5' (corresponding to average recoveries of 10%-30%) reflects this change in approach, and has driven the upgrade of KKB, RSB and Locko's subordinated debt ratings. Ukrexim's subordinated debt rating reflects incremental non-performance risk resulting from the flexibility to defer coupons in certain circumstances, for example if the bank reports negative net income for a quarter. The two notch differential between the bank's VR of 'b' and the subordinated debt rating of 'CCC' therefore reflects one notch for this incremental non-performance risk and one notch (in line with KKB, RSB and Locko) for potentially weaker recoveries due to the instrument's subordination. RATING SENSITIVITIES The subordinated debt ratings of each of the four banks could be upgraded or downgraded if the banks' VRs are upgraded/downgraded. In addition, Fitch acknowledges that regulatory treatment of bank failures, and the specifics of bank resolution mechanisms, are evolving globally, and that these mechanisms are also likely to develop in Russia, Kazakhstan and Ukraine. If bank resolutions in these markets consistently result in subordinated debt holders receiving zero, or negligible, recoveries, then the Recovery Ratings on subordinated debt could be revised back down to 'RR6', resulting in downgrades of the debt ratings. Primary Analyst for KKB, Anton Naberoukhin, Director +7 495 956 9901 Primary Analyst for Locko-bank, Anton Lopatin, Associate Director +7 495 956 7096 Primary Analyst for RSB, Dmitri Vasiliev, Associate Director +7 495 956 5576 Primary Analyst for Ukrexim, Olga Ignatieva, Director, +7 495 956 6906 Secondary Analyst for KKB, Aslan Tavitov, Associate Director, +7 495 956 7065 Secondary Analyst for Locko-bank, Roman Kornev, Associate Director, +7 495 956 7016 Secondary Analyst for RSB, Alexander Danilov, Senior Director, +7 495 956 2408 Secondary Analyst for Ukrexim, Natalia Shakhina, Analyst, +44 0203 530 1577 Committee Chairperson, James Watson, Managing Director, +7 495 956 6657 Julia Belskaya von Tell, Moscow, tel.: + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2013-02-21]