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Fitch Affirms Three Kazakh Policy Institutions
Fitch Ratings-Moscow/London-02 May 2017: Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Development Bank of Kazakhstan (DBK) and House Construction Savings Bank of Kazakhstan (HCSBK) at 'BBB-'. The Outlooks are Stable. Fitch has also affirmed KazAgroFinance's (KAF) Long-Term IDRs at 'BB+' and revised the Outlooks to Negative from Stable. A full list of rating actions is at the end of this rating action commentary.

The affirmation of the Long-Term IDRs and Support Rating Floors (SRFs) reflects Fitch's view of a high propensity of the Kazakhstani authorities to support the institutions, in case of need, due to:
- 100% ultimate (although indirect) state ownership.
- important policy roles in the development of non-extracting economic sectors (DBK), the house savings and mortgage system (HSCBK) and provision of state-subsidised financial leasing to the agricultural sector (KAF) in Kazakhstan.
- a track record of state funding and equity injections to support their expansion (HSCBK and KAF) or solvency (DBK).
- the moderate cost of any support that might be required, given DBK's wholesale debt of 4% of Kazakhstan's 2016 GDP or 6% of sovereign reserves at end-2016, and the other two institutions' wholesale debt being negligible relative to sovereign financial resources.
- guarantees on about 44% of DBK's third-party liabilities from Sovereign Wealth Fund Samruk-Kazyna (BBB/Stable).
- KAF qualifying as a material subsidiary for its owner, KazAgro National management holding JSC (BBB-/Stable), and the latter's USD1.6 billion outstanding Eurobond issue with maturities coming due in 2019 containing a cross-default clause in case of subsidiary default.
- potential adverse reputational, economic or social (in case of HSCBK and KAF) consequences of not supporting them.

The one-notch differential between DBK and HCSBK's 'BBB-' Long-Term IDRs and the sovereign's 'BBB' ratings primarily reflects (i) moderate risks stemming from indirect state ownership through JSC National Management Holding Baiterek (BBB/Stable), as Baiterek's own financial resources are limited, giving rise to moderate risk of delays with receipt and pass-through of sovereign support; (ii) the somewhat loose government supervision of both banks, as no government officials sit on the banks' boards of directors, and DBK is exempt from regulatory oversight by the National Bank of Kazakhstan; and (iii) the moderate risk that the sovereign could cease providing full support to all quasi-sovereign entities before defaulting on its own obligations in a severe stress scenario.

Fitch believes the authorities' plans to partially privatise HCSBK will not significantly affect the state's support propensity, given its intention to retain a controlling stake in the bank and maintain its policy role. Fitch has not assigned a Long-Term Foreign Currency IDR to HCSBK due to its immaterial foreign currency operations.

KAF is rated two notches below the sovereign mainly due to Fitch's view of its somewhat lower importance for the country's economy and financial system compared with DBK and HSCBK. The revision of the Outlooks on KAF's 'BB+' Long-Term IDRs to Negative from Stable reflects the authorities' plans to privatise a controlling stake in the company, potentially by end-2018, and hence the potentially reduced propensity of the state to provide support to the company in the future.

Of the institutions, DBK is most likely to require support due to its significant foreign debt (USD4.5 billion or 72% of liabilities at end-2016) as well as local non-government wholesale obligations (USD0.7 billion or 11%), moderate capital buffer (15% Fitch Core Capital (FCC)/risk-weighted assets (RWAs) ratio at end-2016) and significant foreign-currency loans (64% of gross loans at end-2016) predominantly to high-risk development projects.

The probability of KAF requiring state support in the future is also significant considering its operations in the vulnerable agricultural sector. Non-performing and restructured loans/leases comprised a high 13% and 14% of gross exposures at end-2016, respectively, although asset quality is supported to a degree by low foreign-currency lending, solid collateral coverage and state subsidies to borrowers/lessees. In addition, KAF's moderate leverage reduces the likelihood of support being required. The company's government and parental non-equity funding comprised a sizable 65% of liabilities at end-2016, and could be also converted into equity, if needed.

In Fitch's view, HCSBK is less likely to need support in the medium term in light of its solid loan quality (0.4% non-performing loan ratio at end-2016) and strong capital buffer (41% FCC ratio at end-2016).

The senior unsecured debt ratings of DBK and KAF are equalised with their IDRs and (in the case of KAF) National Long-Term rating.

The Long-Term IDRs of all three institutions, and senior unsecured debt ratings of DBK and KAF, would likely be affected by a change in the sovereign ratings.

The ratings of DBK or HCSBK could be upgraded and equalised with the sovereign if (i) the banks become directly owned by the government and state officials become more directly involved in the oversight of the institutions; or (ii) the government replaces or guarantees most of the banks' funding. A marked weakening of policy roles or association with the sovereign could result in negative rating action. However, neither scenario is currently expected by Fitch. DBK's ratings could also come under downward pressure if leverage increases markedly and asset quality deteriorates sharply without adequate capital support from the authorities.

KAF's Long-Term IDRs could be downgraded if the authorities' plan to privatise the company results in a material weakening of KAF's connection with the Kazakh government and the prospect of the company losing its policy role. The ratings could stabilise at the current level if privatisation plans for KAF are abolished.

The rating actions are as follows:

Development Bank of Kazakhstan
Long-Term Local-Currency IDR: affirmed at 'BBB-'; Outlook Stable
Short-Term Local-Currency IDR: affirmed at 'F3'
Long-Term Foreign-Currency IDR: affirmed at 'BBB-'; Outlook Stable
Short-Term Foreign-Currency IDR: affirmed at 'F3'
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-'
Long term senior unsecured debt rating: affirmed at 'BBB-'
Short term senior unsecured debt rating: affirmed at 'F3'

House Construction Savings Bank of Kazakhstan
Long-Term Local-Currency IDR: affirmed at 'BBB-'; Outlook Stable
Short-Term Local-Currency IDR: affirmed at 'F3'
National Long-Term Rating: affirmed at 'AA+(kaz)'; Outlook Stable
Support Rating: affirmed at '2'
Support Rating Floor: affirmed at 'BBB-'

Long-Term Foreign- and Local-Currency IDRs: affirmed at 'BB+'; Outlooks revised to Negative from Stable
Short-Term Foreign-Currency IDR: affirmed at 'B'
National Long-Term rating: affirmed at 'AA(kaz)'; Outlook revised to Negative from Stable
Support Rating: affirmed at '3'
Support Rating Floor: affirmed at 'BB+'
Senior unsecured debt rating: affirmed at 'BB+'
National senior unsecured debt rating: affirmed at 'AA(kaz)'
Expected senior unsecured debt ratings: affirmed at 'BB+(EXP)'/'AA(kaz)(EXP)'


Primary Analyst
Roman Kornev
+7 495 956 7016
Fitch Ratings CIS Ltd
26 Valovaya Street
Moscow 115054

Source: Fitch Ratings

5 2017 | View: 232 | Press Releases | Printint version
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