STANDARD & POOR RISES ITS RATING OUTLOOK ON HALYK SAVINGS BANK OF KAZAKHSTAN AND KAZKOMMERTSBANK (JSC)

/IRBIS, Apr.28, 00, expanded version/ -REUTERS office in Moscow informed yesterday, that Standard & Poor (S&P) raised rating outlook on two Kazakh bank: Halyk savings bank of Kazakhstan and Kazkommertsbank (JSC). Full text of S&P report is stated below. "NEW YORK, April 26 - Standard & Poor's today revised its outlook on Halyk Savings Bank of Kazakhstan (Halyk) and Kazkommertsbank (JSC) to stable from negative. At the same time Standard & Poor's affirmed all ratings on the banks - including the single-'B'/single-'C' counterparty credit ratings on Halyk, the single-'B'-minus/single-'C' counterparty credit ratings on Kazkommertsbank (JSC) and the single-'B'-minus senior unsecured debt of Kazkommertsbank's subsidiary Kazkommertsbank International BV. Full details of all group ratings are available on RatingsDirect, Standard & Poor's Web- based credit analysis system, or by calling Standard & Poor's Ratings Desk on (33) 1 - 4420-6705. The change in outlook reflects the improved prospects for the Kazakhstani economy after the difficulties of 1998-1999, when fallout from the August 1998 Russian crisis and a sharp 60% devaluation of the tenge (KZT) in April 1999 shook the country. More solid and credible economic management should underpin Kazakhstan's progress toward a market-based economy. During the difficult year of 1999, the banks' policy of indexing tenge loans to the dollar passed the devaluation risk on to borrowers and enabled the banks to limit damage to their financial performance. Prospects for 2000 look better, owing to the already accomplished clean-up of loan portfolios and higher business volumes. Nonetheless, risks remain high in the Kazakhstan! banking system, which remains vulnerable to the fragile industrial sector, concentrations in lending, and limited funding and capital. The ratings on Halyk reflect the bank's weak financial profile and exposure to the high-risk economic and financial environment in Kazakhstan. This is offset by Halyk's dominant position in retail banking, ample liquidity from customer deposits; and status as the state savings bank, majority-owned by the Kazakhstani Ministry of Finance. Halyk had assets of KZT55.9 billion (US$405 million at KZTI38 to US$1) and loans of KZT20.2 billion at year-end 1999. The sharp devaluation in April 1999 saw Halyk's asset quality deteriorate, as most loans were either in dollars or dollar-linked, and many borrowers could not readily meet the foreign currency or increased tenge payments provoked by the devaluation. Halyk converted many dollar and dollar-linked loans into tenge and rescheduled interest payments to allow borrowers time to adjust. In the second half of 1999, the trend of deterioration began to ease, as the economy recovered quickly from the shock of devaluation and the rebound in energy prices helped Halyk's exporter clients. Doubtful and loss loans peaked at 12% of the portfolio at June 30,1999, and then declined to 9% at year-end 1999, helped by substantial write-offs of KZT1.1 billion (5% of loans) during the year. By the end of the year, loss reserves exceeded loss and doubtful loans, giving a 102% coverage ratio. Halyk's dominant role in retail banking and deposit collection from individuals provide great liquidity, but the bank's heavy cost base-11.000 employees and 1.144 outlets - creates high operational leverage. The recent government action concerning Halyk and the Kazakhstan postal system could help the bank reduce costs in the medium term. Under the agreement enacted in late 1999, Halyk will manage the Kazakhstan postal system and transfer public-service activities and inefficient branches to Kazpost, a newly created joint-stock company that will deliver mail and provide basic banking services. Halyk's adjusted common equity to assets ratio was 8.2% at year- end 1999. The small absolute amount of capital, only US$38 million, leaves the bank vulnerable to risk concentrations. Kazkommertsbank's ratings reflect the bank's significant concentrations in loans and funding in the high-risk economic and banking environment in Kazakhstan. Nonetheless, the bank's partially accomplished sale of a stake in Kazakhtelecom in April 2000 and the decision to reverse the policy of financing the equity holdings of sister company Central Asian Industrial Investments (CAII) represents an improvement in Kazkommertsbank's credit profile. Moreover, the bank managed to make it through the difficult year of 1999 with little fall-off in operating profitability. While the Kazakhstani economy looks likely to stabilize in 2000, lending risks remain great, and a high percentage (17%) of Kazkommertsbank's loans were listed as substandard and loss at the end of 1999, after the bank had tightened its internal rules for classifications during the year. Kazkommertsbank, while the biggest bank in Kazakhstan with assets of KZT81.2 billion at year-end 1999 (US$588 million), is small by international comparison and vulnerable to single-party concentrations. The largest credit exposure remains a related-party loan to CAII, the bank's related industrial investment arm, to finance CAII's purchase of a 30% stake in Kazakhtelecom in 1999. In April 2000, CAII repaid US$33.5 million of the original loan, leaving Kazkommertsbank with a still-high US$40 million loan to CAII. Also, in October 1999, Kazkommertsbank sold its 25% stake in Shymkent Oil Refinery (ShNOS) to CAII. While the change in strategy removes the industrial equity risk from Kazkommertsbank's balance sheet, the same individuals own CAII and Kazkommertsbank, and thus the bank remains vulnerable to the actions of its owners in this area. A corporate bank with a limited branch network, Kazkommertsbank relics on wholesale funding to a great extent. This, coupled with concentrations in liabilities, is a weak point in the bank's credit profile. Operating earnings (excluding an exceptional US$27 million gain from the long dollar position in 1999) remain strong, buoyed by the high real rates of interest and opportunities for generating fees and commissions from basic cash handling business, (capital is high compared with assets, but only adequate in light of the high-risk banking environment and risk concentrations of Kazkommertsbank. OUTLOOK: (HALYK SAVINGS BANK OF KAZAKHSTAN) STABLE Halyk will retain its dominant position in the retail market and remain closely tied to the government in the medium term. Potential for a higher credit rating depends on Halyk's success in shedding costs and transforming itself into a modern and competitive bank. In this area, the agreement with Kazpost could help, but the project will take years to implement. The medium-term potential for an upgrade remains limited by the high-risk economic and financial environment in Kazakhstan and by the high level of problem assets still on Halyk's balance sheet. OUTLOOK: (KAZKOMMERTSBANK) STABLE The bank's strong commercial position and relatively good earnings profile compared with other banks in Kazakhstan place it in a position to prosper from economic growth in the country. Potential for higher credit ratings remains limited by continued dependence on wholesale funding, high concentrations in the lending book and funding base, and group investments in industrial concerns. Standard & Poor's said."