OREANDA-NEWS.  Fitch Ratings-London/Moscow/ Hong Kong/Seoul -19 March 2008: Fitch Ratings has today affirmed the ratings of Kazakhstan-based Bank Centercredit (BCC) at Long-term Issuer Default rating (IDR) 'BB-' (BB minus), Short-term IDR 'B', Individual 'D', Support '3' and Support Rating Floor ‘BB-’ (BB minus). The Outlook for the Long-term IDR has been changed to Evolving from Negative. The bank’s senior unsecured debt is rated ‘BB-’ (BB minus).

At the same time, Fitch has affirmed the ratings of Korea’s Kookmin Bank (KMB) at Long-term IDR ‘A+’, Individual ‘B’, Support ‘1’ and Support Rating Floor ‘A’. The Outlook on the Long-term IDR is Stable. KMB’s senior unsecured debt is affirmed at ‘A+’ and its subordinated notes are affirmed at ‘A’.

The rating actions follow the recent announcement that KMB has reached an agreement to acquire a 30% stake in BCC for USD634m (KRW621bn) and intends to increase this stake to 50.1% within 30 months. The mechanism for ultimately increasing KMB’s stake to 50.1% has not been made transparent to Fitch, but the agency’s understanding is that KMB is likely to have concluded an option agreement in respect to the additional stake. The acquisition of the 30% stake is, and the further increase in the stake to 50.1% would be, subject to regulatory approvals in both the Republic of Korea and Kazakhstan.

The change in BCC’s Outlook reflects the much stronger ability of KMB to provide support to BCC, in case of need, than BCC’s current majority shareholder. Fitch does not, at present, expect to upgrade BCC upon completion of the acquisition of a 30% stake by KMB, given the considerable uncertainty over KMB’s support of a foreign bank in which it holds only a minority stake. However, there would likely be significant upside for BCC’s Long-term IDR if and when KMB consolidates a majority stake. “The degree of the upside would depend on KMB’s Long-term IDR at the time of the acquisition and Fitch’s understanding of KMB’s readiness to support a foreign subsidiary bank,” says Alexei Kechko, a Director in Fitch’s financial institutions group. Fitch notes that this is KMB’s first significant cross-border acquisition.

BCC’s Outlook has been changed to Evolving, rather than Positive, as there still exists significant short-term downside risk for the bank’s Long-term IDR. This is because the rating is currently driven by potential support from the Kazakhstani authorities, based on BCC’s significant domestic market shares. If Kazakhstan’s Long-term foreign currency IDR (‘BBB’/Negative Outlook) is downgraded before KMB acquires a majority stake in BCC, then BCC’s Long-term IDR would likely follow suit.
“The affirmation of KMB’s ratings reflects the fact that the acquisition size is relatively small, since the initial investment is equivalent to only 3.9% of KMB’s equity at end-2007,” says Heakyu Chang, an analyst in Fitch’s financial institutions group. “That said, the acquisition is the largest overseas investment not only in KMB’s history, but also in the history of Korean banks in general.”

The net interest margin of Korean banks has been decreasing for the past several years due to strong competition both among banks and from the securities/wealth management industry, forcing the banks to look to overseas markets for growth. Following the acquisition of a 30% stake, KMB intends to strengthen BCC’s supervisory and management boards. In the long-term, KMB is expecting to transfer its skills and expertise in risk management, customer relationship management and credit card business to BCC. KMB has a very ambitious plan to expand its overseas assets to 20% of its total assets by 2015 from 1.2% at end-2007. If successful, Korean banks’ overseas expansion will enhance their credit profiles; Korean banks’ overseas assets at end-2007 are estimated to be just above 3% of the banking system assets.

BCC had USD7.3bn of assets at end-2007 (equal to around 3.1% of KMB’s balance sheet), making it the sixth-largest bank in Kazakhstan, with a market share of 8%. It focuses primarily on the SME and retail segments, utilising a nationwide branch network. After the acquisition of the 30% stake by Kookmin, a 40% stake in BCC will be held by the Chairman of the Board of Directors, Bakhytbek Bayseitov (down from 51.2% at present), and 15% by senior management. It is noted that the initial 30% acquisition will result in new equity of USD160m for BCC.