Moody's Investors Service has upgraded Kazakh ForteBank’s long-term local- and foreign-currency deposit ratings to B3 from Caa1 and its senior unsecured debt ratings to Caa1 from Caa2, the ratings agency said on September 27. The outlook on ratings is stable.
The upgrade reflects reduced concerns over the integration of the group's three predessor banks following their merger in early 2015 as well as its limited track record of operations, Moody's said. “Since the completion of the merger, the bank has demonstrated stable operational performance with progress in the recovery of problem loans, improved recurring profitability and reduced refinancing risks,” the ratings agency said but warned that the high level of problem loans and low provisioning coverage remain rating constraints, despite the high reported capital ratios.
The merger was completed in the first quarter of 2015, with a newly installed IT system providing smooth data transfer. According to the bank’s new development strategy, ForteBank is focused on retail and small and medium-sized (SME) business development with a moderate risk appetite and continued recoveries of legacy problem loans.
Within two years, the bank recovered 15.5% of its total legacy problem loans, of which 10% were in cash. Following the implementation of a new retail scoring system, the bank's new loan issues quality indicators have improved, demonstrating better vintages and reduced first payment defaults, though this still needs to be tested further, according to Moody's.
ForteBank's pre-provision income has also recovered since 2014, but the bank continues to accrue interest on non-performing loans – the net-interest margin (NIM) “is overstated relative to received interest and therefore reported earnings are of weaker quality”, the agency noted. Moody’s expects the reported NIM to fall as problem loans are written off, which will decrease the gap between accrued and received interest income. “Rising funding costs exacerbate pressure on the NIM, as depositors convert their savings from foreign currency to local currency to benefit from higher interest rates, although this will also reduce the bank's currency mismatch,” the agency said.
The proportion of tangible assets financed by wholesale funding decreased to 12.9% as of June 2016, from 18% at December 2014. The bank repurchased KZT11.8bn (€31.2mn) of its eurobonds in 2015 given excess liquidity, and aim for a further gradual buyback of more expensive market debt replacing it mainly with customer deposits.
Remaining constraints are the bank's low provisioning coverage and high share of problem loans, partially mitigated by relatively good loan recovery prospects. ForteBank's problem loans amounted to 36% of gross loans, while total nonperforming loans (NPLs) accounted for 29% of gross loans as of June 2016. Loan loss reserves (LLRs) covered only 20.5% of total problem loans or 25% coverage of NPLs. The bank expects a recovery of most problem loans based on existing collateral. The rating agency, while conservative in its assessment of problem loan recoveries in Kazakhstan, acknowledges the positive track record of the new management team in the problem loan workout process to date.
The capitalisation ratios appear strong with a Tier 1 of 19.7% and total capital adequacy of 22.5% as of June 2016, but the agency takes into account in that the bank's capital buffer may be eroded by the need to increase LLR coverage of problem loans.
“Moody's incorporates one notch of government support uplift into ForteBank's deposit ratings given the rating agency's assessment of a moderate probability that government support would be extended to the bank's deposit holders,” the agency added.
The ratings will be upgraded further in the event of progress on loan recoveries, an improvement in both profitability and earnings quality, lower bad loans, better loan loss reserves coverage, and strong loss-absorption capacity maintenance. Ratings could be downgraded in case of a material deterioration of its asset quality, a substantial rise in credit losses, a decrease in recurring profitability and a drop in capitalisation beyond the agency’s current expectations.
Moody’s also said that the bank’s subordinated debt rating was upgraded to Caa2 from Caa3 and the short-term foreign-currency deposit rating was affirmed at NP. ForteBank's baseline credit assessment (BCA) and adjusted BCA were upgraded to caa1 from caa2, reflecting reduced corporate governance risks, improved profitability and progress in the recovery of problem loans. The long-term Counterparty Risk Assessment (CRA) was upgraded to B2(cr) from B3(cr) and the short-term CRA was affirmed at NP(cr).
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