Fitch revises Alliance Bank (Kazakhstan) ratings

/Fitch Ratings, London/Moscow, December 23, 13, heading by KASE/ – Fitch Ratings has downgraded Kazakhstan's Alliance Bank JSC's Long-term Issuer Default Ratings (IDRs) and senior unsecured bond rating to 'C' from 'CCC'. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS The downgrade of Alliance's IDRs to 'C' from 'CCC' and Viability Rating (VR) to 'c' from 'cc' reflects Fitch's view that the default is now probably imminent in light of (i) recent statements by Alliance's new management that it plans to initiate discussions with stakeholders, including the bank's creditors, to recapitalize the bank; (ii) the bank's weak stand-alone financial position, which may be worse than previously disclosed in light of additional provisioning requirements identified by management; and (iii) the absence of any plans of either the Kazakh authorities or the bank's new private shareholder to recapitalize the bank without creditor participation. In a recent presentation to creditors (subsequently published), management highlighted the bank's weak capitalization, additional provisional requirements, structurally weak profitability and tight liquidity. Specifically, management estimated that the bank needs to create further KZT75bn-KZT95bn of loan impairment reserves (equal to 11%-14% of gross loans, or 13%-16% of Basel I risk-weighted assets at end-9M13). At end-9M13, Alliance reported a low Basel II Tier I capital ratio of 2.4%; the regulatory capital ratios were a higher 9.1% (Tier I) and 13.4% (total), respectively, mainly due to lower impairment reserves in statutory accounts. Fitch Core Capital was negative, mainly due to the deduction of deferred tax assets (which are included in Basel capital). Creation of the additional impairment reserves identified by management, coupled with smaller announced write-downs of other assets, would result in the bank reporting deeply negative equity in both regulatory and IFRS accounts. A full write- down of the bank's subordinated obligations and recovery notes (in the IFRS accounts) would, therefore, be insufficient to restore the bank's capital position, meaning that some further recapitalisation measures will also be required. Fitch does not exclude the possibility that the bank's majority shareholder (67% stake) National Welfare Fund Samruk Kazyna's (SK) or the expected new private shareholder Bulat Utemuatov (acquiring a 16% stake from SK; has also purchased an 80% stake in another failed bank, Temirbank, from SK) will make some contribution to Alliance's recapitalization. However, the tone of the recent statements in Fitch's view clearly indicated that the bank's senior creditors will also be expected to participate in the recapitalisation. The downwards revision of Alliance's Support Rating Floor to 'No Floor' from 'CCC' reflects Fitch's view that regulatory forbearance for the bank is unlikely to be extended beyond the near term, and that any support from the Kazakh authorities is unlikely to be sufficient to prevent default. Management expect to present a more comprehensive assessment of capital requirements in mid-January 2014 when, Fitch believes, forms of debt restructuring affecting senior creditors (excluding depositors) are likely to be proposed. RATING SENSITIVITIES Implementation of a restructuring of the bank's senior obligations, which, in Fitch's view, involves a material reduction of terms relative to the original contractual terms, would, in accordance with the agency's 'Distressed Debt Exchange' criteria, result in the IDRs being downgraded to 'RD' (Restricted Default). Fitch does not expect to take any further rating action as a result of the bank's announced intention, as part of its liquidity preservation measures, not to make payments to holders of recovery notes, which are due this week. In Fitch's view, the recovery notes do not represent obligations, default on which would "best reflect the uncured failure of the entity", (as provided for in the agency's rating definitions), and so would not trigger a downgrade of the bank's IDRs to default level. The rating actions are as follows: Long-Term foreign currency IDR: downgraded to 'C' from 'CCC' Short-Term foreign currency IDR: affirmed at 'C' Long-Term local currency IDR: downgraded to 'C' from 'CCC' Viability Rating: downgraded to 'c' from 'cc' Support Rating: affirmed at 5 Support Rating Floor: revised to 'No Floor' from 'CCC' Senior debt rating: downgraded to 'C' to 'CCC'; Recovery Rating 'RR4' Subordinated debt rating: affirmed at 'C'; Recovery Rating 'RR5'. Contacts: Primary Analyst Roman Kornev Associate Director +7 495 956 7016 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Aslan Tavitov Associate Director +7 495 956 7065 Committee Chairperson Alexander Danilov Senior Director +7 495 956 2408 Media contacts: Juliya Belskaya von Tell, Moscow, tel. + 7 495 956 9908/9901, julia.belskayavontell@fitchratings.com [2013-12-27]