November 28, 2017 / 1:15 PM / a year ago

Fitch: No Rating Impact from Halyk's 3Q17 IFRS Accounts

(The following statement was released by the rating agency) MOSCOW, November 28 (Fitch) The financial profile of Halyk Bank of Kazakhstan (Halyk, BB/Stable) in its 3Q17 IFRS accounts, the first to be published after the acquisition and consolidation of Kazkommertsbank (KKB, BB-/Stable), is largely in line with Fitch Ratings' expectations, and commensurate with the bank's ratings. We do not expect any near-term rating actions on Halyk's ratings, as reflected by the Stable Outlook on the bank. Based on the 3Q17 accounts, Fitch continues to view Halyk's capital adequacy as reasonable, its performance as strong and funding and liquidity profile as solid. Against this, the amount of potentially problem assets is elevated, although we believe that Halyk's pre-impairment profit is sufficient to gradually increase provisioning of these, if required. Non-performing loans (NPLs, 90 days overdue) in the 3Q17 accounts were reported at 13.4% and were 64% covered by reserves. In accordance with IFRS3, Halyk consolidated KKB's loan book on a net basis. On a gross basis, the amount of NPLs in the consolidated book would have been higher, at around 25%, which is just marginally above our expectations, and coverage would have been 112%. The significantly lower coverage reported in the accounts results from KKB's NPLs net of specific reserves being added to Halyk's NPL denominator, while KKB's provisions (some of which were held against performing loans) are not added to Halyk's reserve numerator. In addition to NPLs, renegotiated loans in the reported accounts (i.e. those reported on a gross basis at Halyk and those added net of specific reserves from KKB) accounted for 11% of the portfolio. Fitch estimates that at end-3Q17 the group's unreserved NPLs were equal to a moderate 20% of Fitch Core Capital (FCC), with renegotiated loans equal to an additional 46%. These ratios are broadly in line with those expected by Fitch. The group's FCC ratio stood at 15.7% at end-3Q17, slightly above our expectations. Regulatory capitalisation at both Halyk and KKB, in each case based on unconsolidated accounts, is also reasonable, with Tier 1 ratios of 20.2% and 15%, respectively, at end-3Q17. This compares with a regulatory minimum of 10.5%, including a capital conservation buffer of 3% and systemic importance buffer of 1%. KKB's capitalisation has been further strengthened in November by a new equity injection from Almex Holding (Halyk's majority shareholder) of KZT65 billion. This is equal to around 6% of KKB's standalone regulatory risk-weighted assets or 12% of the group's exposure to the above-mentioned unreserved NPLs and renegotiated loans. Capitalisation and net problem-loan exposures are likely to remain supported by Halyk's robust profitability. The group's annualised pre-impairment profit for the three months ended 30 September 2017 equalled a strong 8% of gross loans. The bottom line was also strong, with an annualised return on equity of around 25% in the third quarter. However, we believe that moderate pressure on bottom line performance is likely to stem from the operational integration between Halyk and KKB and potential additional provisioning needs for the latter. The funding and liquidity profile is strong, as expressed by the group's low 56% loans/deposits ratio. The group's pricing power and deposit collection capacity remain the strongest in the sector. Near-term contractual repayments of external wholesale funding are limited to KKB's USD300 million Eurobond issue maturing in May 2018. At end-3Q17, the group's liquidity buffer exceeded KZT4 trillion (an equivalent of USD12 billion). An upgrade of Halyk's ratings would require the successful integration of KKB and a reduction in unreserved problem and renegotiated loans relative to capital. Conversely, Halyk's ratings may be downgraded in case of additional deterioration in the quality of legacy loans, or significant impairment of new loans. KKB's IDRs and senior unsecured debt rating reflects potential support from Halyk, given the latter's ownership and KKB's strategic importance for the group. An upgrade of KKB's IDR to the level of Halyk would be possible if the bank becomes more deeply integrated with Halyk, leading to a higher propensity to support. This may be the case if Halyk develops a clear strategy for the bank and aligns KKB's risk management more closely with its own, and if KKB demonstrates an ability to generate considerably stronger core profits. The banks' ratings are as follows: Halyk Bank of Kazakhstan Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs): 'BB', Outlook Stable Short-Term Foreign- and Local-Currency IDRs: 'B' Viability Rating: 'bb' Support Rating: '4' Support Rating Floor: 'B' Senior unsecured debt: 'BB' Kazkommertsbank Long Term Foreign- and Local-Currency IDRs: 'BB-', Outlook Stable Short Term Foreign- and Local-Currency IDRs: 'B' Viability Rating: 'b' Support Rating: '3' Support Rating Floor: 'B' Senior unsecured debt long-term rating: 'BB-' Senior unsecured debt short-term rating: 'B' Perpetual debt rating: 'B' Contact: Dmitri Vasiliev Director +7 495 956 5576 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 James Watson Managing Director +7 495 956 6657 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email:; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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