OREANDA-NEWS. Standard & Poor's Ratings Services lowered its long-term counterparty credit rating on Halyk Savings Bank of Kazakhstan to 'BB' from 'BB+' and affirmed its short-term counterparty credit rating at 'B'. The outlook is stable.

We also lowered the Kazakhstan national scale rating on Halyk Bank to 'kzA+' from 'kzAA-'.

The downgrade reflects our view that the Kazakhstan government's financial capacity to provide extraordinary support to systemically important private sector banks has gradually weakened over the past 18 months.

We expect GDP growth in Kazakhstan to stagnate or to contract modestly in 2016, in view of the economy's high dependence on the oil sector, which accounts for an estimated 20% of GDP, 50% of fiscal revenues, and 60% of exports. We forecast weaker exports and roughly flat oil production (unless the large offshore Kashagan oil field comes fully on stream earlier than 2018), as well as reduced domestic consumption due to the devaluation of the Kazakhstani tenge, high inflation, and weak consumer lending. For 2017-2019, we expect a moderate economic recovery as consumption and investments somewhat pick up. Longer-term growth prospects will depend on the pace of the oil price recovery, the Kashagan project, and progress in announced structural reforms.

A weak external environment has resulted in the substantial depreciation of the tenge by about 50% since August 2015. We believe that the ability of the national bank, NBK, to influence domestic monetary conditions remains constrained by weak transmission mechanisms. Apart from shallow capital markets, the banking system is extremely vulnerable and has become increasingly dollarized. More importantly, the recent oil price drop and further tenge depreciation will present the NBK with deepening challenges, including maintaining financial stability, supporting credit and economic growth, and keeping inflation within previously- stated targets. In this context, we see increasing risks to the predictability and effectiveness of the NBK's policies.

We view Halyk Bank to be of high systemic importance in Kazakhstan, as the second-largest bank by assets and corporate deposits, with a market share of above 20% in terms of retail deposits. High systemic importance means that we consider that Halyk Bank's failure would likely have a highly adverse impact on Kazakhstan's financial system and the real economy.

Nevertheless, we believe that the Kazakh government's financial capacity to provide extraordinary support to systemically important private sector banks, such as Halyk, has gradually weakened. Therefore we have removed the one-notch uplift for extraordinary government support from the long-term rating on Halyk Bank because the difference between Halyk Bank's stand-alone credit profile (SACP) of 'bb' and the local currency sovereign credit rating of 'BBB-' is not wide enough to warrant it, according to our methodology.

Our rating action also acknowledges that this less-supportive economic environment in Kazakhstan is likely to put pressure on Halyk Bank's new lending and on the creditworthiness of its borrowers, especially in view of sharp tenge depreciation since August 2015. This is likely to reduce Halyk Bank's capacity to continue accruing capital internally. We expect Halyk Bank's profitability to normalize at a weaker level in 2016, compared with 2014.

The 'BB' long-term rating on Halyk Bank remains the highest among private sector banks we rate in Kazakhstan, and reflects the superior business and financial profiles of the bank versus those of local peers. Although Halyk Bank is not immune to the economic slowdown, we think the bank is relatively well positioned to sustain itself, thanks to sufficient capital levels.

The stable outlook reflects our expectation that the bank's business and financial profiles will remain at their current levels over the next 12 months. We expect that Halyk Bank will remain resilient to the weakened operating environment in Kazakhstan due to its adequate capitalization buffer and more cautious growth strategy over the past five years than its smaller domestic peers'.

We could consider a negative rating action over the next 12 months if the bank's loans more than 90 days overdue under IFRS increase above the system average or if the bank's liquidity in tenge becomes insufficient due to an inability to hedge its wide mismatch between assets and liabilities in foreign currency.

A positive rating action is unlikely in the next 12 months due to the negative economic and industry risk trends in the Kazakh banking sector and their effect on Halyk Bank's business and financial profile.