April 01, 2010 |
|Fitch Ratings-London/Moscow-1 April 2010: Fitch Ratings has today downgraded Kazakhstan-based Kaspi Bank's (Kaspi) Long-term Issuer Default Rating (IDR) to 'B-' from ‘B’. The Outlook is Stable. A full rating breakdown is provided at the end of this announcement.|
The downgrade reflects the bank’s reduced financial flexibility due to tighter capitalisation, continuing asset quality deterioration and weak operating profitability in a still challenging operating environment. The ratings remain supported by Kaspi’s strong deposit base and low dependence on wholesale markets.
Kaspi’s financial performance has remained weak, reflecting the severity of local market conditions over the past two years. For 2009, the bank is expected to have slipped into a net loss position under IFRS, mainly due to an increase in credit impairment charges. Pre-impairment profitability has also weakened, due to continuing pressure on the net interest margin from falling interest rates and higher funding costs, as relatively cheap wholesale funding is replaced by more expensive customer deposits.
To tackle the profitability challenges, Kaspi embarked on a rapid credit expansion in 2009, taking advantage of strong deposit inflow and widespread client defections from insolvent institutions. Enhanced focus has been placed on high-yield unsecured consumer lending with the aim of reversing the recent decline in margins. Together with the strong growth recorded in the corporate book, this has resulted in a 38% increase in gross loans in 2009. Overall, Fitch views cautiously Kaspi’s recent and ongoing business expansion efforts, given the pace of growth, the tightening of capitalisation and the still fragile economic recovery in Kazakhstan.
Similarly to other Kazakh banks, Fitch believes that, despite some write-offs in the previous two years, a significant amount of impaired exposures remain on Kaspi’s balance sheet, as indicated by the current level of NPLs (90-day-overdues, equal to 7% at end-2009) and the amount of accrued interest (6% of gross loans at end-2009 under local accounts). Although loan impairment reserves accounted for 110% of the reported NPLs, Fitch believes that the bank will likely continue to experience high loan impairment charges, although management’s efforts at enhancing pre-impairment operating performance should help to absorb these.
Kaspi’s capitalisation levels have come under pressure as risk-weighted assets increased and profitability was negative. At end-2009, the tier I and total capital adequacy ratios (CARs) under Basel I are expected to be 14.6% and 17.5% based on IFRS management accounts, down from 21.3% and 25.5%, respectively, at end-2008. From a regulatory standpoint, Kaspi's regulatory capital ratios provide a smaller safety margin, with the total capital ratio standing at 13% (minimum requirement 10%) at end-Feb 2010, mainly due to the fact that the subsidiary insurance company (accounting for 16% of equity in consolidated IFRS statements) is not consolidated in the local accounts.
Positively for its credit profile, Kaspi has recorded some impressive deposit growth of late (53% in 2009). Growth occurred in both the retail and corporate segments, while maturities of deposits have been extended. At end-2009, 48% matured in more than one year and deposits with maturities over two years represent around 42% of all customer accounts. This reduced the bank’s non-deposit funding ratio to 31% of liabilities, down from 42% at end-2009, and the ratio is set to fall further after repayment of KZT10bn local subordinated bonds in 2010. At the same time, Fitch notes that the stability of this incremental deposit base is yet to be demonstrated over time, and that retail term deposits in Kazakhstan can be withdrawn on demand.
Kaspi was the 8th-largest commercial bank in Kazakhstan at end-April 2009 with a 2.7% share of the banking system's assets. Kaspi's focus has been on the wide-margin, but potentially high-risk, SME and retail sectors. The bank is controlled by Baring Vostok Capital Partners, a private equity firm which invests in the CIS, which owns a 51% stake in a holding company controlling 96% of Kaspi’s shares. Kazakh businessman Vyacheslav Kim holds a 49% stake in the holding company.
The rating actions are as follows:
Long-term foreign currency IDR: downgraded to 'B-' from ‘B’; Outlook Stable
Short-term foreign currency IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Company: Kaspi Bank
|Full company name||Joint Stock Company "Kaspi Bank" (ex The Caspian Bank)|
|Country of risk||Kazakhstan|
|Country of registration||Kazakhstan|