Fitch downgrades Alliance Bank (Kazakhstan) ratings
27.05.13 11:02
/Fitch Ratings, Moscow-London, May 24, 13, heading by KASE/ – Fitch Ratings
has downgraded Kazakhstan-based JSC Alliance Bank's Long-Term Issuer Default
Ratings (IDRs) to 'CCC' from 'B-'. A full list of rating actions is at the end
of this commentary.
KEY RATING DRIVERS - IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND SENIOR DEBT
The downgrade of the IDRs, Support Rating Floor and senior debt rating reflects
Fitch's view that a new restructuring of the bank's debt now appears a real
possibility. This view is based on (i) the plan of the major shareholder,
National Wealth Fund Samruk Kazyna (SK), to sell the bank, (ii) Fitch's
understanding that SK is unlikely to inject capital into Alliance prior to any
sale in order to support the bank's viability; and (iii) the agency's
understanding that regulatory forbearance in respect to the bank's
capitalisation is unlikely to be extended beyond the near term, meaning that a
restructuring of the bank is likely if a buyer is not found in reasonably short
order.
The 'CCC' Long-Term IDRs and senior debt rating are based on the 'CCC' Support
Rating Floor and remain one notch above the bank's 'cc' Viability Rating. This
reflects the limited support benefits still available to Alliance as a result of
its government ownership, in particular (i) considerable funding made available
to the bank from SK and the National Bank of Kazakhstan (NBK), (ii) the
readiness of SK to support the sale and viability of Alliance by promoting a
merger with the better capitalised Temirbank (unrated), which is also majority
owned by SK, and (iii) likely continued regulatory forbearance in the near
term, while sale negotiations are ongoing.
The plan to sell Alliance follows an instruction given by President Nazarbayev
at the start of this year that SK should exit the capital of all three Kazakh
restructured banks - Alliance, Temirbank and BTA Bank ('CCC'/ Rating Watch
Positive) - by end-2013. In Fitch's view, it will likely be challenging to find
a buyer for Alliance due to its weak solvency.
SK has indicated that it may seek to sell Alliance and Temir together to a
single buyer. However, Fitch understands that SK is unlikely to merge the banks
prior to disposal (in order not to potentially delay the sale process long
after the end-2013 deadline), and instead may try to make a subsequent merger a
condition of any sale. Fitch calculates that a merged bank would be likely to
meet minimum regulatory capital requirements (even after bringing statutory
reserves into line with those under IFRS), making a combined sale of the two
banks potentially more attractive than that of Alliance alone. However,
considerable uncertaintly remains as to whether any such sale will go ahead,
given the still weak financial position of any merged bank, limited overall
demand for Kazakh banking assets and considerable operational hurdles related
to necessary approvals from creditors and minority shareholders of both banks.
In Fitch's view, if SK has not made significant progress towards a sale by the
end-2013 deadline, then it will likely seek to restore Alliance's solvency
through a restructuring of the bank's liabilities.
KEY RATING DRIVERS - VR
Alliance's 'cc' VR reflects the bank's weak stand-alone financial strength,
including (i) still negative Fitch Core Capital (FCC) at end-2012, (ii) the high
level of impaired non-earning assets and significant restructured loans, the
latter potentially resulting in further pressure on capital, (iii) weak
pre-impairment profitability, and (iv) increasing refinancing risk.
Alliance's reported Basel I Tier I and total capital adequacy ratios (CARs) were
a low 2.7% and 4.1%, respectively, at end-Q113, while FCC remained negative due
to deduction of deferred tax assets. At the same time, the bank's regulatory
CARs were, respectively, 13.2% and 18.6%. The difference is primarily explained
by an additional KZT31bn of loan impairment reserves in the IFRS accounts, and
the KZT22bn liability recorded in the IFRS statements on the recovery notes.
During 2013, the NBK plans to bring into force a new regulation requiring banks
to align their statutory provisions with those under IFRS; this will result in
Alliance breaching minimum regulatory capital ratios, which will likely further
increase the urgency of a resolution of the bank.
The persistently high non-performing loans (NPLs; loans more than 90 days
overdue; 49% of the portfolio at end-2012 and end-Q113) reflect minimal
recoveries since Alliance's default in 2009. Reserve coverage of NPLs was a
reasonable 85% at end-2012 (84% at end-Q113). Restructured loans were a
significant 24% of gross loans at end-2012, but Fitch is informed that some of
these are already classified as NPLs, making it difficult to assess the extent
of any potential further pressure on capital from these exposures. Moreover,
the quality of the bank's unsecured consumer loans (the main source of recent
growth) has weakened, with consumer NPL origination equal to 9% of the average
performing portfolio in 2012 and 11% (annualized) in Q113.
Core profitability was weak in 2012, in particular due to strong inflow of quite
expensive retail deposits, which were the main driver of a 38% reduction in net
interest income. As a result, Alliance reported a KZT4.3bn net pre-impairment
loss for 2012, although the bank achieved marginally positive pre-impairment
profit (KZT0.2bn) in Q113 due to earning assets growth and the higher coupon
yield on SK bonds.
Alliance's liquidity position remains fragile in view of upcoming external debt
principal repayments of USD74m in 2014, USD148m in 2015, USD148m in 2016
and USD103m in 2017 (all figures net of bonds repurchased by the bank).
USD419m of liquid assets at end-Q113, including USD112m of cash and deposits and
USD307m of repoable SK and sovereign bonds, covered these repayments by 88%.
Alliance also had USD1bn of loans maturing in less than 12 months at end-2012,
suggesting that additional liquidity could be generated through a slowdown in
issuance of new consumer loans, although this would further undermine
profitability.
RATING SENSITIVITIES
The IDRs could ultimately be downgraded to 'RD' and the VR to 'f' if SK fails to
find a buyer for Alliance and announces that it will seek to resolve the bank
through a restructuring of its liabilities. The IDRs could also be downgraded if
the bank is sold to a weak new shareholder without measures being taken to
strengthen the bank's capitalisation by either SK or the new owner.
The ratings could stabilise at their current levels, or be moderately upgraded,
if the bank's capitalisation is strengthened as a result of the sale and/or
merger process.
KEY RATING DRIVERS AND SENSITIVITIES - SUBORDINATED DEBT
The 'C' subordinated debt rating is notched down from the bank's VR. The 'RR6'
Recovery Rating reflects weak recovery prospects in case of default.
The rating actions are as follows:
Long-Term foreign currency IDR downgraded to 'CCC' from 'B-'
Short-Term foreign currency IDR downgraded to 'C' from 'B'
Long-Term local currency IDR downgraded to 'CCC' from 'B-'
Viability Rating affirmed at 'cc'
Support Rating affirmed at 5
Support Rating Floor revised to 'CCC' from 'B-'
Senior debt rating downgraded to 'CCC' from 'B-'; Recovery Rating at RR4
Subordinated debt rating downgraded to 'C' from 'CC'; Recovery Rating at RR6.
Primary Analyst,Dmitri Abramov, Director +7 495 956 2409
Secondary Analyst, Roman Kornev, Associate Director+7 495 956 7016
Committee Chairperson, Alexander Danilov, Senior Director +7 495 956 2408
Media Relations:
Julia Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901,
julia.belskayavontell@fitchratings.com
[2013-05-27]