S&P: Kazakhstan-Based ATFBank Assigned 'B/B' Global Scale And 'kzBB' National Scale Ratings; Outlook Negative
At the same time, we assigned our 'kzBB' Kazakhstan national scale rating to the bank.
Our ratings on ATFBank reflect the high operating environment risks for a commercial bank functioning primarily in Kazakhstan, which we factor into our 'bb-' anchor (the starting point for assigning a rating to a bank) for Kazakhstan domestic banks. They also reflect our view of the bank's moderate business position as the fifth-largest bank in Kazakhstan; its weak capital and earnings, due to its small capital buffer, which are restrained by elevated credit costs and low profitability; the bank's moderate risk position, reflecting significant legacy nonperforming loans (NPLs) and potential new loan-loss provisions required; and finally the bank's average funding and adequate liquidity, owing to its diversified funding base and an abundant liquidity cushion.
The long-term rating on ATFBank is one notch higher than its stand-alone credit profile, reflecting our view of the bank's moderate systemic importance in Kazakhstan as the fifth-largest bank with a market share of 4.4% in total loans and 6.0% in total deposits on Aug. 1, 2016. This means we consider that ATFBank's failure would likely have a material, but manageable, adverse impact on Kazakhstan's financial system and real economy. Thus, we believe ATFBank has a moderate likelihood of receiving extraordinary support from the government if needed.
We assess ATFBank's business position as moderate, reflecting the bank's medium size and its cautious business development strategy implemented by the experienced management team.
ATFBank was acquired by a Kazakh businessman, Galimzhan Yessenov, in June 2013 from UniCredit SpA.
The new management, installed by the new shareholder aims to substantially reduce legacy NPLs and deleverage the balance sheet, while increasing the share of retail and small and midsize enterprise (SME) customers, both in lending and funding. We expect that the bank will manage to retain its current position among the top 10 banks in Kazakhstan and proceed with new sustainable business development over the next 12 months.
Our assessment of ATFBank's capital and earnings as weak reflects our view of the bank's low capitalization, as measured by our risk-adjusted capital (RAC) ratio and our expectation that its internal capital generation will be restrained by the persistently elevated credit costs, with no planned capital injections in the next two years, despite a reduction in risk-weighted assets. We envisage that our RAC ratio for the bank won't exceed 3.1% in the next 18 months. If credit losses or loan growth dynamics exceed our expectations, then it could slip below 3% in the next 18 months.
The bank's core profitability is weak, with return on adjusted assets below 1% in 2014-2015. The core earnings are insufficient to rebuild capital and provide enough loss-absorption capacity if the quality of the loan portfolio deteriorates. We don't expect that the bank's net interest margin and core profitability will improve in the next 18 months, due to the bank's planned deleveraging and our expectations of elevated credit costs.
Our assessment of ATFBank's risk position as moderate, in comparison with other Kazakh banks bearing the same economic risk, factors in the still significant level of NPLs and high single-name concentrations, mitigated by continued bad loan write-offs and recovery, and historically conservative loan growth.
In our view, the management team has achieved a significant reduction of legacy NPLs through recoveries and write-offs. As a result, NPLs reported under International Financial Reporting Standards reduced to a still high 21.4% as of Dec. 31, 2015, from 44.2% two years earlier. On a positive note, restructured loans represented less than 1% of total loans at year-end 2015. However, we consider provision coverage of NPLs to be relatively low, at 76% as of year-end 2015, although coverage has increased from 68% as of year-end 2014. This level is lower than for the majority of Kazakh peers.
However, in view of still unfavorable economic environment in Kazakhstan, we expect that the level of NPLs will still remain sizable for ATFBank, due to still large exposure to corporate clientele involved in international trade that are affected by the economic stagnation. Thus, we expect that new loan-loss provisions will likely be required over the next 12 months. This will exert further pressure on the bank's profitability and capital.
Our assessment of ATFBank's funding as average and liquidity as adequate is based on the bank's diversified funding base, which includes long-term capital market sources, and its abundant liquidity cushion, balanced against notable reliance on short-term wholesale funding.
The bank's funding base is predominantly comprised of customer deposits (80% of total liabilities as of April 1, 2016), and also includes such long-term sources as bond issues (10% of total liabilities) and subordinated debt (7% of total liabilities).
The bank's stable funding ratio of 146% at April 1, 2016, is stronger than the average of local peers. At the same time, ATFBank's loan-to-deposit ratio was at a healthy 73.2% as of April 1, 2016, which compares favorably with the Kazakh banking system average of 97% on the same date.
As of April 1, 2016, ATFBank had a sizable liquidity cushion, with the net broad liquid assets covering 57% of short-term customer deposits, which compares favorably with local peers.
The negative outlook on ATFBank reflects the one-in-three likelihood of a downgrade if the pressure on the bank's asset quality, profitability, and capital increases over the next 12-18 months, owing to weaker economic growth prospects and the negative impact of substantial tenge devaluation.
We could lower the ratings if ATFBank's asset quality deteriorates considerably over the next 12-18 months, which would result in the rise in credit costs up to the expected system average of 3.0%-3.5% by the end of 2016, exerting further pressure on the bank's profitability and capital and pushing the RAC ratio down below 3%.
We could revise the outlook to stable in the next 12-18 months if the bank's capital buffer expands significantly, resulting in a RAC ratio, as calculated by S&P Global Ratings, remaining sustainably above 3%, supported by stronger profitability or on the back of sufficient capital injections.