OREANDA-NEWS. Fitch Ratings has downgraded Kazakhstan-based Kazkommertsbank's (KKB) Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'B-' from 'B' and its Viability Rating (VR) to 'b-' from 'b'. The Outlook is Negative.

Fitch has also downgraded BTA Bank's Long-term IDRs to 'CCC' from 'B-' and withdrawn the entity's ratings. The ratings of KKB's Russian subsidiary Moskommertsbank (MKB) were also withdrawn. A full list of rating actions is provided at the end of this commentary.

KEY RATING DRIVERS - KKB's IDRS, VR, SENIOR DEBT RATING
The downgrade of KKB's VR, which drives the downgrade of Long-term IDRs and senior debt rating, reflects negative revisions in Fitch's view of the volume of the bank's problem exposures and their recovery prospects, and a significant weakening in the bank's pre-impairment performance. The ratings also take into account the moderate loss absorption capacity offered by the bank's capital. However, the ratings are supported by KKB's moderate refinancing and liquidity risks, and a track record of significant debt repayments in a challenging environment.

The revision in Fitch's view of KKB's asset quality is driven primarily by (i) a recent large transfer of mostly land and real estate loans, the majority of which were reported as performing, by KKB to its subsidiary BTA, which afterwards ceded its banking licence and will operate as a distressed asset management company once it is divested by KKB in the near future; and (ii) KKB's resultant exposure to BTA, equal to 3.5x KKB's end-1H15 Fitch Core Capital (FCC).

Other factors that contribute, albeit to a lesser extent, to Fitch's negative view of KKB's asset quality prospects are i) a currently more challenging operating environment for asset recoveries, including real estate assets, as a result of the moderate slowdown in the Kazakh economy; and (ii) the absence of bad loan purchases from KKB's balance sheet by the Kazakh authorities (although fair value gains on long-term funding provided by the Problem Loan Fund (PLF) has helped to finance some write-offs).

Asset quality remains weak in KKB's retained loan book, notwithstanding the transfer of problem assets to BTA and sizable write-offs (equal to KZT600bn, or 20% of loans) in 2014. At end-1H15, KKB's adjusted non-performing loan (NPL) ratio was a high 30% of gross loans, excluding exposure to BTA. Net of total loan impairment reserves, NPLs represented 20% of KKB's FCC. In addition, KKB has significant exposures in its largest performing real estate loans, which Fitch views as high-risk.

Capital ratios declined in 2014 and 1H15, due to risk-weighted asset (RWA) growth, weak internal capital generation and share repurchases, including from the National Welfare Fund Samruk Kazyna (SK). The FCC/ RWA ratio was a modest 11% at end-1Q15. Fair-value gains on PLF funding (equal to 2pts of RWA) have supported capital since end-1Q15, although these have been partially offset by further impairment charges (which were substantial in regulatory accounts in 2Q15).

Core profitability has weakened as a result of increases of interest accrued on loans but not received in cash and higher operating expenses. Pre-impairment profit, adjusted for uncollected loan interest income and large derivative losses, declined to close to zero in 1Q15, compared with 0.6% of average gross loans in 2014 and 2% in 2013. We expect the bank to be loss-making at the pre-impairment level, net of interest accrued on the BTA exposure, in the medium term, given the current balance sheet and cost structures.

KKB's liquidity position is currently a moderately supportive factor for its ratings given its high level of liquid assets, the bank's status as the largest deposit taker in Kazakhstan with a 20% market share, the absence of onerous covenants on wholesale obligations and moderate upcoming debt repayments. Liquid assets (mostly, cash with the National Bank of Kazakhstan), boosted by PLF funding injection, were equal to a high 35% of the bank's customer deposits or 25% of its total liabilities at end-1H15, although a significant share of these may be used to finance credit growth. Its upcoming USD294m eurobond repayment, due in November 2015, is equal to a small 7% of liquid assets at end-1H15.

KEY RATING DRIVERS - KKB'S SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
Fitch has affirmed the bank's '5' SR and revised its SRF to 'No Floor' from 'B-'. The SRF revision reflects our opinion that solvency support for the bank from the Kazakh authorities, in an amount sufficient to address the bank's asset quality problems, cannot be relied upon. At the same time, Fitch believes that moderate capital assistance (as evidenced by the PLF contribution) and continued regulatory forbearance remain possible, and liquidity support, at least in local currency, is likely.

KEY RATING DRIVERS - KKB'S SUBORDINATED DEBT
The downgrade of the subordinated and perpetual debt ratings reflects that on KKB's VR. This is because the respective debt are notched down by once and twice from the bank's VR, reflecting weak recovery prospects in case of default.

KEY RATING DRIVERS - BTA BANK AND MKB
The downgrade of BTA reflects its disposal by KKB, and the entity's weak asset quality and capitalisation. The Rating Watch Positive (RWP) on BTA's ratings had reflected the potential an upgrade of the bank in case of a merger, or closer integration with, KKB. As a result, BTA is no longer considered to be relevant to Fitch's analytical coverage, leading to today's withdrawal.

We have withdrawn MKB's ratings without affirmation because the issuer has chosen to stop participating in the rating process, and Fitch will therefore no longer have sufficient information to maintain the ratings.

Fitch will no longer provide ratings or analytical coverage for BTA or MKB.

RATING SENSITIVITIES - KKB
The Negative Outlook on KKB's Long-term IDRs reflects the potential for these ratings and the bank's VR to be downgraded in case of a further weakening of the bank's capitalisation resulting from (i) negative pre-impairment profitability (net of accrued interest); or (ii) increased provisioning requirements on problem exposures.

The Outlook could be revised to Stable if the capital position stabilises as a result of reasonable performance or further moderate capital support from the Kazakh authorities. Any downgrade of KKB's Long-term IDRs and VR would also be reflected in changes in the bank's debt ratings.

RATING SENSITIVITIES - KKB'S SUBORDINATED DEBT
The ratings are sensitive to the same considerations that would affect KKB's VR.

The rating actions are as follows:

KKB
Long-Term foreign and local currency IDRs: downgraded to 'B-' from 'B'; Outlook Negative
Short-Term foreign and local currency IDRs: affirmed at 'B'
Viability Rating: downgraded to 'b-' from 'b'
Support Rating: affirmed at '5'
Support Rating Floor: revised to 'No Floor' from 'B-'
Senior unsecured long-term debt rating (including that of Kazkommerts International BV): downgraded to 'B-' from 'B'; Recovery Rating 'RR4'
Senior unsecured short-term debt rating: affirmed at 'B'
Subordinated debt rating: downgraded to 'CCC' from 'B-'; Recovery Rating 'RR5'

KAZKOMMERTS FINANCE 2 BV
Perpetual debt rating: downgraded to 'CC' from 'CCC'; Recovery Rating 'RR6'
BTA Bank
Long-Term foreign and local currency IDRs: downgraded to 'CCC' from 'B-'; removed from RWP; withdrawn
Short-Term foreign and local currency IDRs: downgraded to 'C' from 'B'; withdrawn
Viability Rating: affirmed at 'ccc'; withdrawn
Support Rating: affirmed at '5'; removed from RWP; withdrawn

MKB
Long-term foreign currency IDR: 'CCC'; withdrawn
Short-term foreign currency IDR: 'C'; withdrawn
National Long-term rating: 'B(rus)'; withdrawn
Viability Rating: 'ccc'; withdrawn
Support Rating: '5'; withdrawn