Baku, Azerbaijan, Dec. 7
By Elena Kosolapova – Trend:
Standard & Poor's Ratings Services has lowered the long-term counterparty credit rating on Kazakhstan-based JSC Eurasian Bank to 'B' from 'B+', the agency said Dec.7.
The outlook is stable, according to the agency.
The agency also affirmed the short-term counterparty credit rating at 'B'.
At the same time, the agency lowered the national scale rating on the bank to 'kzBB' from 'kzBBB-', and lowered global scale ratings on Eurasian Bank's nondefferable subordinated debt to 'CCC+' from 'B-' and national scale ratings on this debt to 'kzB+' from 'kzBB'.
The downgrade stems from the agency’s reassessment of Eurasian Bank's risk position to moderate from adequate. Despite significant tightening of its credit approval rates since mid-2014 and enhancement of collection procedures, the bank's loan portfolio quality, in both corporate and retail segments, has markedly deteriorated over 2015, the message said.
The level of nonperforming loans (NPLs; loans overdue more than 90 days) increased to 11.1 percent of total loans on Nov. 1, 2015 (under local standards), from 7.5 percent on Jan. 1, 2015, S&P said. In addition, NPL coverage by loan loss provisions decreased to a very low 52 percent from 73 percent on the same dates. This compares unfavorably with the sector average of 114 percent as of Nov. 1, 2015.
As a result, S&P thinks that Eurasian Bank will likely counter this by raising its provisioning expenses going forward, which will hinder its financial performance.
The agency continues to see the bank's business position as moderate, reflecting the risks of its rapid expansion over the last few years, tight capital policy, and still moderate market share. That said, S&P notes that Eurasian Bank enjoys the benefits of the established franchise, solid reputation in Kazakhstan, and experienced management team.
The stable outlook on Eurasian Bank reflects the agency’s expectation that the bank's experienced management team will be able to mitigate the pressure on the bank's financial results given the depressed economic environment and constrained systemwide funding in the Kazakh banking sector in the next 12-18 months.
While the agency anticipates credit losses in 2016, it sees the capital injection from shareholders as a buffer that will support the bank's financial profile going forward.
In addition, although the agency expects Eurasian Bank's NPLs to stay high at close to 10 percent of overall loans, it considers that the advanced collection processes will result in better recovery of its problem loans compared with the agency’s expectations for most other Kazakh banks.
S&P would take a negative rating action if Eurasian Bank's forecast RAC ratio fell below 5 percent. This may result from the new loan loss provisions markedly exceeding the agency’s expectation of 3.5-4.0 percent of total loans per year over the next two years. In the agency’s view, one of the key reasons for elevated credit costs going forward is the bank's very low coverage of NPLs by provisions of only 52 percent on Nov. 1, 2015.
A positive rating action is unlikely in the next 12-18 months given the increasing economic and industry risks in the Kazakh banking sector, according to the message of the agency.
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