The International Rating Agency Fitch Ratings has placed Halyk Bank of Kazakhstan's (HB) 'BB' Long-Term Issuer Default Ratings (IDRs) and its 'bb' Viability Rating on Rating Watch Negative, the rating agency said in a message March 10.
Fitch has also placed the 'CCC' Long-Term IDRs of Kazkommertsbank (KKB) on Rating Watch Evolving and downgraded the bank's Viability Rating to 'f' from 'ccc'.
The rating actions follow recent announcements by the banks and the Kazakh authorities on HB's potential acquisition of a controlling stake in KKB.
The Rating Watch Negative on HB's ratings reflects the possible negative impact on HB's capitalization and asset quality as a result of the potential acquisition of KKB.
Fitch expects that HB will only acquire KKB if the latter first receives direct or indirect considerable financial support. The National Bank of Kazakhstan has announced that such support is likely to take the form of a purchase of KKB's problem assets by the problem loan fund (PLF).
Notwithstanding this expected support, Fitch believes there is a material risk that KKB's problem assets may not be fully removed from the bank's balance sheet or adequately reserved prior to a transaction. Senior country officials recently committed to providing 2 trillion tenges to the PLF for subsequent problem asset purchases, of which 1.1 trillion tenges has been provided. This compares with a net exposure to BTA of 2.4 trillion tenges.
HB's capitalization could weaken significantly as a result of the acquisition of KKB.
Potential additional provisioning needs on KKB's assets could represent a further drag on HB's solvency, although this would still be supported by HB's strong internal capital generation, in Fitch's view.
Fitch does not expect any significant negative impact on HB's strong funding and liquidity profile as a result of the transaction. Any cash payment for KKB is likely to be small relative to HB's liquidity buffer and Fitch does not expect material volumes of KKB's debt to be accelerated as a result of any acquisition. The consolidated loans/deposits ratio (assuming the removal of the BTA exposure) would be about 64 percent, compared with 79 percent at HB at end-3Q16.
The Rating Watch Negative on KKB's 'CCC' Long-Term IDRs reflects the potential for the ratings to be upgraded as a result of an acquisition by a higher-rated institution and the expected clean-up of the loan book and the potential for the ratings to be downgraded to 'RD' (Restricted Default) if any losses are imposed on senior creditors as part of the restoration of the bank's solvency (the authorities have given no indication that losses will be imposed). The ratings could also be downgraded in case of a hypothetical breakup of the deal and, hence, the collapse of the main financial rehabilitation scenario for KKB proposed by the authorities.
The downgrade of KKB's Viability Rating to 'f' from 'ccc' reflects Fitch's view that the bank has failed and requires external support to address a material capital shortfall. In Fitch's view, the planned large asset sale to the PLF represents a de-facto recognition by the Kazakh authorities of the scale of KKB's asset-quality and solvency problems. Fitch has not downgraded KKB's IDRs following the downgrade of the VR as the bank continue to services its obligations and may receive external support without losses being imposed on senior creditors.
Fitch expects to take rating actions on HB, KKB and HB's subsidiaries - Halyk Finance (HF) and Halyk Bank Georgia (HBG) when the acquisition is completed (or abandoned) and sufficient information is available on the financial profiles of the entities following the transaction. The resolution of the rating watches may take more than six months, although Fitch understands that if the parties go ahead with the planned transaction, then they aim to complete it reasonably promptly.
HB and its subsidiaries could be downgraded if in Fitch's view the bank's asset quality and/or capitalization weaken materially as a result of the acquisition. However, the ratings could be affirmed if in Fitch's view any weakening of asset quality or capitalization is moderate, or if the transaction is abandoned.
KKB could be upgraded to a rating level close to that of HB if it is acquired by the latter and in Fitch's view HB would have a strong propensity to support its subsidiary. KKB could be downgraded if senior creditors absorb losses as part of the bank's resolution, or if the transaction is abandoned without an alternative creditor-friendly resolution scenario being proposed.