OREANDA-NEWS. June 22, 2011. Fitch Ratings has affirmed Kazakh BTA Bank's (BTA) and Alliance Bank's Long-term foreign currency Issuer Default Ratings (IDR) at 'B-'. A full rating breakdown is at the end of this comment.

The IDRs of both banks reflect Fitch's assessment of the possibility of support from the Kazakh authorities. The banks' government ownership and the  reputational risk for the Kazakh authorities of repeated default of any of these banks create incentives to provide support, in Fitch's view. However, in its assessment of potential support, the agency also considers the fact that neither of these banks represents a strategic investment for the Kazakh authorities, as well as the absence of any clear statements on support from senior Kazakh government officials.

On Fitch's Individual Rating scale, which reflects a bank's standalone risk, the both banks are rated 'E', the lowest rating for a performing bank. This rating would map to an "unsupported" Long-term IDR of 'CCC' or lower. In both cases, the Individual Ratings incorporate negative equity under IFRS, weak asset  quality and core profitability and concerns over the viability of business  models, given the structural balance sheet weaknesses and the erosion of market  positions since 2008.

The banks report considerable equity deficits under IFRS, but remain in compliance with the local prudential regulations. The latter, in Fitch's view, require a degree of regulatory forbearance, particularly in case of BTA which reports lower bad debt provisioning and a considerably higher valuation of investments in associates under local GAAP. Both banks also benefit from waivers  provided by the FMSA, allowing them to account for their investments in  Samruk-Kazyna bonds at their notional value rather than their fair value for the purposes of regulatory capital.

Core profitability is weak at both banks, suffering from depressed asset  quality, large investments in low-yield Samruk-Kazyna bonds and the high cost of  funding. Fitch expects the net interest margin to be negative for BTA and marginally positive for Alliance in 2011. The outlook for profits is also  weighed down by the uncertainty surrounding the value of the banks' loan  portfolios This is particularly of concern at BTA given its large legacy book  and recent increases in loan impairment reserves, as evidenced in the much  greater provisioning made in end-2010 audited financial statements compared with  the preliminary management accounts.

BTA and Alliance defaulted in 2009, mainly because of a high level of bad loans. Following restructuring, they are now majority controlled by government-owned Sovereign Wealth Samruk-Kazyna (81.5% for BTA and 67% for Alliance), with the  minority stakes held by creditors affected by the restructuring.

The rating actions are as follows:

BTA Bank:            Long-term foreign currency IDR: affirmed at 'B-'; Outlook Stable Long-term local currency IDR: affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Short-term local currency IDR: affirmed at 'B' Individual Rating: affirmed at 'E' Support Rating: affirmed at '5' Support Rating Floor: revised to 'B-' from 'No Floor' Senior unsecured debt: affirmed at 'B-'; Recovery Rating is 'RR4' Subordinated debt: affirmed at 'CC'; Recovery Rating is 'RR6'.

 Alliance Bank:

Long-term foreign currency IDR: affirmed at 'B-'; Outlook Stable Long-term local currency IDR: affirmed at 'B-'; Outlook Stable Short-term foreign currency IDR: affirmed at 'B' Individual Rating: affirmed at 'E' Support Rating: affirmed at '5' Support Rating Floor: revised to 'B-' from 'No Floor' Senior unsecured debt: affirmed at 'B-' Subordinated debt: affirmed at 'CC'; Recovery Rating is 'RR6'.