S&P improved ratings forecast of Kazkommertsbank

/IRBIS, Dec 20, 01/ - REUTERS informs that international rating agency Standard & Poor's changed the ratings forecast of the biggest bank of Kazakhstan in terms of assets, Kazkommertsbank, to "positive" from "stable". Long-term rating of the banks was unchanged at "B", short-term at "C". It is said that the change reflects the improvement in the perspectives of the Kazakhstani economy thus enabling the bank to expand the funds and develop profitable financing business, though quick growth rate of the financing may increase risk if the economic growth slows down. Also, it was added that the failure to buy 33.3% of Halyk Bank in November did not affect the ratings of the bank, but the acquisition of the bank with the widest network of branches and low quality of assets would have a negative impact on Kazkommertsbank ratings. Following is the full text of the S&P message in English: "Standard & Poor's today revised its outlook on Kazakhstan-based Kazkommertsbank (JSC) (KKB) to positive from stable. At the same time, the single- 'B' long-term and single-'C' short-term counterparty credit and certificate of deposit ratings were affirmed. The change in KKB's outlook reflects the improved economic prospects of the Republic of Kazakhstan, which has enabled the bank to attract primary funds (significantly strengthening its funding profile) and grow profitable lending business. The staggering rate of loan growth is a risk factor if the economy slows down, however. KKB's plans for acquiring Halyk Savings Bank in November 2001 did not materialize. The aim was mainly to access Halyk's very strong mass-retail funding base to support KKB's corporate banking business. The failure to acquire Halyk has no negative implications for the bank's ratings as KKB has been successfully diversifying its funding base on its own while Halyk's negative asset quality and efficiency issues would have actually constrained KKB's ratings. The reversal of KKB's policy on financing the equity investments of its sister company, Central Asian Industrial Investments (CAII), will improve the bank's credit profile. Moreover, KKB has reserved 50% against accrued interest on its loans to CAII, and has set aside provisions covering 43.2% of the principal, thereby reducing its biggest single-party risk concentration. Nonetheless, while the Kazakh economy has been showing positive trends since 2000, the bank retains significant concentrations in loans and funding in what remains a high-risk economic and banking environment. Its prudent practice of setting aside significant loan loss provisions for potential problems stemming from the sharp devaluation of the Kazakhstan tenge (KZT) in April 1999 (from gains of its long foreign exchange position) paid off in 2000. With assets of KZT165 billion at Sept. 30, 2001 ($1.12 billion), KKB is the largest bank in Kazakhstan. However, it is still small by international standards and vulnerable to single-party concentrations. The largest credit exposure remains a related-party loan to CAII--the bank's industrial investment arm--to finance CAII's purchase of a 30% stake in Kazakhtelecom in 1998 (which CAII is now finding difficult to sell, despite interest on the part of the European Bank for Reconstruction & Development (EBRD)). In April 2000, CAII repaid $33.5 million of the original loan, leaving KKB with a still-high $38.2 million loan exposure. While KKB's decision to end its policy of lending to CAII to finance the latter's industrial investments removes the risk of volatile equity investments from KKB's balance sheet, KKB and CAII are owned by the same individuals, and thus KKB remains indirectly vulnerable to any potential financial needs of its owners. A corporate bank with a limited branch network, KKB has in the past relied to a great extent on wholesale funding. Coupled with concentrations in liabilities, this factor was a weak point in the bank's credit profile. Conscious of this, and intent on entering the high end of the retail market in Kazakhstan, KKB expanded customer deposits dramatically in 2000 to 69% of total liabilities (33% at year-end 1999 and 51% at year-end 2000). Operating earnings remain strong, buoyed by the high real rates of interest and opportunities for generating fees and commissions from basic cash- handling businesses. KKB's performance in 2000 was better than that of the previous year despite the substantial reduction in foreign currency revaluation income, due to higher business volumes in 2000 and the over- prudent reserving of the bank's loan portfolio in 1999. This trend continued in 2001, with annualized ROE reaching 24.5% during the first nine months of 2001 (26.7% in 2000) buoyed by high interest margins, increased volumes, and improved efficiency. KKB's capital is high compared with its level of assets, but only adequate in light of the high-risk Kazakh banking environment and the bank's heavy risk concentrations. OUTLOOK: POSITIVE KKB's strong commercial position and good earnings profile compared with its domestic peers place it in a position to prosper from economic growth in Kazakhstan. The potential for higher credit ratings remains positive. KKB has been very successful at diversifying its funding on its own--even without acquiring Halyk's strong funding base--which will alleviate its continued dependence on wholesale funding. Growth should continue reducing high concentrations in the lending book and funding base. The ratings could be lowered if KKB is tempted to provide group investments in industrial concerns".