S&P downgrades long-term rating of Bank CenterCredit from B+ to B; outlook stable
At the same time, we lowered our Kazakhstan national scale rating on BCC to 'kzBB+' from 'kzBBB'.
The rating actions stem from our concerns about BCC's continuously poor earnings, which are placing further pressure on its capital buffers. We therefore consider that BCC's business position has weakened to "moderate" from "adequate," given its track record of very low profitability over the past seven years. BCC's poor performance is an outlier compared with that of its peers. Contrary to our previous expectations, we believe it is highly unlikely that BCC's profitability will increase to that of peers within the next two years, due to more difficult operating conditions in the Kazakh banking sector.
We expect that stagnating economic growth in Kazakhstan, with GDP growth forecast at 1.5%-2% in 2015-2016 compared with 6% on average over the past five years, and the tenge's devaluation by more than 30% since August 2015 would reduce business prospects, new business generation, and profitability for all Kazakh banks, including BCC. We do not expect material improvements in BCC's core profitability (excluding one-time items) over the next two years.
Despite BCC's management's efforts to increase operating efficiency and profitability following losses in 2009 and 2010, BCC's net income remained very low from 2011 until the first half of 2015. The bank's annual return on average assets of about 0.07% over the past three and a half years is clearly significantly below the average of 1.3% reported by rated peers. In our view, BCC's peers are banks we rate that have an adequate business position in countries with banking industry risk comparable with that in Kazakhstan, such as Russia, Uzbekistan, Georgia, Azerbaijan, and Nigeria.
BCC's long history of poor profitability is inconsistent with our assessment of an "adequate" business position, especially in comparison with that of peers. In our view, BCC's profitability will likely continue to lag that of the peer group over the next two years.
We view BCC's marginal earnings generation in the context of its weak capitalization. We project that the risk-adjusted capital (RAC) ratio for BCC, according to Standard & Poor's methodology, will continue declining, reaching less than 4% in 2015-2016 after 4.2% at year-end 2014 and 4.7% at year-end 2013. Shareholder Tier 1 capital injections are unlikely in the next 18 months; therefore, the bank's earnings are crucial to augment its slim capital buffer.
We expect that credit costs for BCC and the wider Kazakh banking system will increase over the next 18 months, owing to a moderate deterioration in asset quality, which we anticipate will come from seasoning of loans amid more difficult operating conditions and from the weak tenge.
BCC's funding costs will likely remain elevated, due to the need to obtain tenge liquidity and hedge a mismatch between assets and liabilities in foreign currency that has widened significantly in the past 12 months.
Our assessment of other bank-specific factors is unchanged. The long-term counterparty credit rating is one notch higher than BCC's stand-alone credit profile, which we place at 'b-'. The uplift reflects our belief that BCC would likely receive support from the government if required, due to its moderate systemic importance for the Kazakh banking sector.
The stable outlook reflects our expectation that BCC's business and financial profiles will remain balanced at the current rating level over the next 12 months. We expect the bank to maintain its market shares in loans and deposits and its moderate systemic importance in the Kazakh banking system.
We could take a negative rating action if significant additional provisions to address asset quality deterioration put material pressure on the bank's capitalization, resulting in our forecast RAC ratio declining below 3%. Inability to manage a growing mismatch between foreign currency assets and liabilities, resulting in insufficient liquidity in tenge, could also trigger a negative rating action in the next 12 months.
Upside potential is limited over the next 12-18 months because it would require substantial strengthening of the bank's loss-absorption capacity, either through larger capital buffers or stronger bottom-line earnings.