OREANDA-NEWS. April 02, 2010. Fitch Ratings English translation, KASE headline/ - Fitch Ratings-London/Moscow-01 April 2010: Fitch Ratings has today revised the Outlook of Kazakhstan-based Eurasian Bank (EBK) to Stable from Negative and affirmed the bank's Long-term Issuer Default Rating (IDR) at 'B-'. A full rating breakdown is provided at the end of this comment.

The revision of EBK's Outlook to Stable reflects the bank's now solid loss absorption capacity compared to credit risks faced, following a large KZT9bn equity injection in Q409. It also factors in the better prospects for the Kazakh economy during the remainder of 2010. Fitch expects Kazakhstan's economy will grow 3% this year compared with a contraction of 1.5% in 2009, which should help to limit further asset quality deterioration. The bank's ratings remain constrained by EBK's weak operating profitability, undiversified funding, still high customer concentrations on both sides of the balance sheet, significant related party business and its plans to grow rapidly during 2010 without attracting further capital injections.

The deterioration in asset quality in 2009 was broadly in line with Fitch's assumptions made in 2008, with NPLs (loans overdue by 90 days) rising to 10.7% of the portfolio at end-February 2010 from 4.6% at end-2008; most of the growth in NPLs was reported in H109. The agency expects a continued, albeit slowing, inflow of non-performing loans in 2010, which should, nevertheless, peak during the year given the more favourable outlook for the operating environment. Exposure to the real estate and construction sectors is sizeable,  at 33% of the loan book at end-2009, and restructured loans are also significant. However, Fitch notes that accrued interest accounted for a moderate 10.1% of total interest income in 2009 statutory accounts, which is comfortably the lowest ratio among Fitch-rated banks in Kazakhstan.

Funding is primarily sourced from customer accounts, which accounted for 81% of liabilities at end-2009. Despite 72% customer account growth in 2009, concentrations and dependence on related parties remain high. At end-2009, liquidity was ample (with liquid assets comprising 30% of total assets), as credit expansion was put on hold pending the bank's recapitalisation in Q409,  and deposits continued to grow. However, this level of liquid assets is likely  to quickly fall with the resumption of loan growth. EBK remains relatively immune  to refinancing risk, and has no plans to tap foreign capital markets this year.

Shareholder equity injections during 2009 allowed EBK to reserve current problem loans and provided some buffer to absorb potential losses in the current loan portfolio. At end-February 2010, the bank's total regulatory capital ratio was 16.4%, and it could have increased its reserves/loans ratio to 21% without breaching minimum capital requirements. However, looking forward, Fitch believes that capitalisation is likely to come under pressure in light of the bank's weak profitability, potential for further NPL recognition and ambitious growth plans.

Key to further movements in EBK's ratings will be capitalisation levels and liquidity management, as the bank seeks to grow amid the economic recovery. Downward rating pressure could re-emerge should the targeted growth be weakly managed from a credit risk or liquidity management perspective, or should asset quality deterioration on the bank's current portfolio be more severe than is currently anticipated by Fitch. Given the bank's limited track record, narrow franchise, aggressive growth plans and weak performance, upside rating potential is currently limited.

The rating actions are as follows:
Long-term IDR: affirmed at 'B-'; Outlook revised to Stable from Negative
Short-term IDR: affirmed at 'B'
Individual Rating: affirmed at 'D/E'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No floor'

At end-2009, EBK was Kazakhstan's seventh-largest commercial bank, with 2.8% of banking system assets. The bank is ultimately owned by three local businessmen - Alijan Ibragimov, Alexander Machkevich and Patokh Chodiev - who also control a 43.7% stake in the Eurasian Natural Resources Corporation (ENRC). ENRC is the world's largest stainless and carbon steel raw materials provider with strong regional power production. Kazakhmys Eurasia B.V. and the government, hold a 14.59% and a 19.31% stake in ENRC, respectively

In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.