AKIPRESS.COM - Fitch Ratings has downgraded Kazkommertsbank's (KKB) the Long-term Issuer Default Ratings (IDRs) to 'CCC' from 'B-'.

The agency has also affirmed the Long-term IDRs of Subsidiary Bank Sberbank of Russia, JSC (SBK) at 'BB+' Halyk Bank of Kazakhstan (HB) at 'BB', Tsesnabank (TSB) at 'B+', Bank Centercredit (BCC) at 'B' and ATF Bank JSC at 'B-'.

The Outlook on Tsesnabank has been revised to Negative from Stable. The Outlooks on Halyk, BCC and ATF are Stable and on SBK Negative. SBK's Viability Rating (VR) has been downgraded to 'b+' from 'bb-'. The full list of the rating actions is provided at the end of this commentary.

The negative rating actions on KKB, SBK and Tsesnabank reflect increased pressure on the banks' asset quality and capitalisation, primarily as a result of the depreciation of the Kazakh tenge and the slowdown of the domestic economy. The affirmation of HB reflects the bank's sizable capital buffer and strong pre-impairment profitability, which should enable it to absorb any moderate further pressure on asset quality. The affirmations of BCC and ATF reflect their low ratings, which already largely capture risks relating to the weaker operating environment, and - in BCC's case - a fairly low proportion of foreign currency loans.

Each of the banks has faced considerable increase in deposit dollarisation over the last two years, with the proportion of foreign currency liabilities ranging between 58% and 68% (with the exception of BCC - 46%) at end-3Q15. Banks have been able to maintain close-to-flat FX positions as a result of cheap currency swaps from the National Bank of Kazakhstan (NBK), and Fitch expects these to remain available. However, increased balance sheet dollarisation has resulted in a heightened proportion of foreign currency loans, which will be difficult to reduce materially over the medium term.

KKB's downgrade reflects a significant increase in the volume of problem (mostly foreign currency- denominated) exposures relative to Fitch Core Capital (FCC), primarily as a result of the tenge's devaluation. The ratings also consider the bank's weak recurring profitability. Taking into account the increased volume and weaker recovery prospects of the problem exposures, Fitch believes KKB will, ultimately, likely require external capital support and/or a restructuring of its liabilities to restore its solvency. However, the extended track record of regulatory forbearance and debt service to date suggests that the bank's resolution may not be a near-term event.

KKB's main problem asset is its exposure to former subsidiary BTA Bank, which increased to 5.3x FCC at end-3Q15 from 4.1x FCC at end-1H15 (3.5x FCC estimated by Fitch when it downgraded KKB in August 2015) and comprised 51% of KKB's gross loans. These loans, which are ultimately backed by land exposures on BTA's balance sheet with remote/unclear recovery prospects, are likely to have increased to approximately 6.5x FCC at end-2015, following further tenge depreciation in 4Q15.

Non-performing loans (NPLs) made up a further 14% of gross loans (i.e. 27% of the portfolio net of the BTA exposure) at end-3Q15, and a moderate 0.4x FCC net of specific impairment reserves. Further asset quality risks stem from currently performing foreign-currency loans, which accounted for 8% of the loan portfolio (0.8x FCC) and property investments comprising an additional 0.2x FCC at end-3Q15.