OREANDA-NEWS. June 16, 2010. Standard & Poor's Ratings Services said that it had raised its long-term counterparty credit ratings on Kazakhstan-based Alliance Bank JSC to 'B-' from 'D' and its short-term counterparty credit ratings to 'C' from 'D'. The outlook is stable. At the same time, we assigned a Kazakhstan national scale rating of 'kzBB-', reported the press-centre of KASE.

The ratings are underpinned by Alliance's strong links with Samruk Kazyna, a 100% state-owned holding company that acts on behalf of the Kazakh government (foreign currency BBB-/Stable/A-3, local currency BBB/Stable/A-3). In accordance with our criteria for rating government-related entities, the long-term rating on Alliance incorporates one notch of uplift above the bank's stand-alone credit profile.

Our view that there is a "moderate" likelihood of timely and sufficient extraordinary government support is based on our assessment of Alliance's:

- "Strong" link with its 67% shareholder, Samruk Kazyna, as the bank currently represents one of the government's largest investments in the financial sector; but "Limited importance" in Kazakhstan's economy, as the bank does not provide a public service or function that could not be readily undertaken by other banks.

Our assessment of Alliance's stand-alone credit profile incorporates our view that the bank's restructuring is now legally complete.

The key outcomes of the restructuring are as follows:

- Total financial debt has been reduced to about USD1.08 billion from about USD 4.4 billion.

- Samruk-Kazyna has become the majority shareholder with the bank's creditors holding the remaining 33%.

- The bank has been recapitalized through an USD 877 million injection from Samruk-Kazyna.

With total assets of USD 2.8 billion on March 31, 2010, Alliance ranks among the 10 largest Kazakh banks. We believe that Alliance may eventually increase its market share in the retail and small business segments as it now benefits from direct government support.

However, we still take the view that the bank's  stand-alone credit profile is very weak and that Alliance requires a substantial balance sheet clean-up, funding diversification, and recapitalization to make  its medium-term growth strategy viable. Based on our analysis of the bank's preliminary unaudited financial report for the first quarter of 2010, we believe that the key factors constraining the stand-alone credit profile now include:

- An extremely high level of nonperforming loans (about 60.2% of total loans more than 90 days overdue on March 31, 2010).

- Weak capitalization. Our calculation of adjusted total equity excluding preference shares is still negative.

Our baseline scenario is that bad loans will peak in the second quarter of 2010, with some potential for recoveries, and, consequently, stronger capitalization ratios. However, we do not expect significant recoveries in what Alliance calls the "bad bank" segment of its loan portfolio. A substantial number of the recipients of these loans are subject to criminal investigations and legal proceedings involving the bank's former owners and management.

The stable outlook reflects our expectation that the Kazakh government will continue to provide ongoing liquidity support.