Fitch Upgrades Kazakhstan's Kaspi Bank to 'B'; Withdraws Ratings
December 29, 2012 Fitch Ratings
Fitch Ratings-London/Moscow-28 December 2012: Fitch Ratings has upgraded Kazakhstan-based Kaspi Bank's Long-term Issuer Default Rating (IDR) to 'B' from 'B-', and Viability Rating (VR) to 'b' from 'b-'. The Outlook is Stable. Simultaneously, the agency has withdrawn the bank's ratings as Kaspi has chosen to stop participating in the rating process. Therefore, Fitch will no longer have sufficient information to maintain the ratings, and accordingly will no longer provide ratings or analytical coverage. A full list of the rating actions is at the end of this commentary.
Rating Rationale - IDRs and Viability Rating
The upgrade of the Long-term IDR and VR reflect Kaspi's strengthened market positions in consumer retail lending and deposit-taking, its improved and currently strong performance and reduced deposit concentrations. The ratings are also supported by the bank's so far satisfactory retail asset quality, currently comfortable liquidity and satisfactory capitalisation, and the broadly favourable operating environment.
However, the ratings also take into account the risks associated with the bank's rapid growth, some uncertainty about how the bank's consumer lending business will perform through the cycle, asset quality weaknesses in the corporate portfolio and the lack of information available to Fitch regarding the bank's ownership structure.
Rating Drivers - IDRs and Viability Rating
Kaspi's rapid mass-market retail lending growth (59% in 9M12 after 70% in 2011) has enabled it to become the leading bank in Kazakhstan by outstanding volume of unsecured consumer loans. This has been made possible by the rapid roll-out of effective sales channels, good access to retail deposit funding and limited focus of potential competitors on this market segment. Strong growth has improved scale efficiencies and deepened the bank's franchise, although also gives rise to significant credit and operational risks. At end-9M12, retail loans comprised 58% of the portfolio, SMEs 10% and corporates 32%.
Non-performing loans (NPLs; overdue by more than 90 days) remained flat at about 15% of total gross loans throughout the year to end-9M12, which in part reflects limited write-offs (typical for Kazakhstani banks). Loan impairment charges between 2009 and 9M12 have been in the 5%-7% range, which is consistent with strong bottom line performance, given the high net interest margin, improved fee income and better efficiency. Pre-impairment profit was equal to 10.4% of average assets (annualised) in 9M12, and net income 3.7%.
At the same time, Fitch has some concerns about asset quality in both the retail and corporate books. The rapid growth of the retail book and the high proportion of less affluent customers on the market suggest that portfolio performance could be vulnerable to adverse macroeconomic developments (although Fitch does not currently expect these) or a seasoning of the book. Furthermore, a significant amount of corporate and SME loans carried on the balance sheet through the crisis continue to generate large interest accruals not being received in cash.
Strong pre-impairment profit has allowed Kaspi to build up loan impairment reserves (LIRs), which at end-9M12 covered NPLs by 114%. Solid earnings retention has supported capitalisation, with the Fitch core capital ratio standing at 14.5%, notwithstanding rapid growth. At the same time, Fitch views capitalisation as only satisfactory given rapid ongoing growth, significant problems in the corporate book which are not all captured in the NPL numbers, and considerable accrued interest on the balance sheet, which accounted for 46% of equity at end-9M12.
Kaspi is funded primarily by customer deposits, which accounted for 80% of liabilities at end-9M12, with retail comprising 80% of these. The two bank's largest deposit customers accounted for 19% of deposits at end-9M12, down from 36% at end-9M11.
Rating Sensitivities - IDR and VR
The Outlook on the Long-term IDR is Stable. The bank's credit profile could further benefit from an extended track record of sound performance as the loan book seasons and growth moderates, and improved performance of its corporate and SME books in a supportive economy. A deterioration in performance as the loan book seasons, potentially leading to a weakening of capitalisation, would be negative.
Rating Drivers and Sensitivities - Support Rating and Support Rating Floor
The Support Rating of '5' and Support Rating Floor of 'No Floor' reflect uncertainty about the ability and/or willingness of the bank's shareholders and the Kazakh authorities to provide support in case of need. Continued increase in the bank's retail deposit market share would raise the likelihood of government support for the bank, in Fitch's view.
The rating actions are as follows:
Long-term IDR: upgraded to 'B' from 'B-'; Outlook Stable; withdrawn
Short-term IDR: affirmed at 'B'; withdrawn
Viability Rating: upgraded to 'b' from 'b-'; withdrawn
Support Rating: affirmed at '5'; withdrawn
Support Rating Floor: affirmed at 'No Floor'; withdrawn
Company — Kaspi Bank
Full nameJoint Stock Company "Kaspi Bank" (ex The Caspian Bank)