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Rating Action:

Moody's assigns first-time B3 deposit ratings to Bakai Bank, outlook stable

16 Jul 2020

London, 16 July 2020 -- Moody's Investors Service, ("Moody's) has today assigned a B3 first-time long-term local and foreign currency deposit ratings to Kyrgyzstan-based Bakai Bank OJSC (Bakai Bank). The outlook on the deposit ratings is stable. Concurrently, the rating agency assigned Bakai Bank a Baseline Credit Assessment (BCA) of b3 and an Adjusted BCA of b3.

Moody's has also assigned the bank a long-term local and foreign currency Counterparty Risk Rating (CRR) of B2, a long-term Counterparty Risk Assessment (CR Assessment) of B2(cr) and Not Prime (NP) short-term local and foreign currency CRRs and NP(cr) short-term CR Assessment. The bank was also assigned NP short-term local and foreign currency deposit ratings.

A full list of assigned ratings can be found at the end of this press release.

RATINGS RATIONALE

KYRGYZSTAN VERY WEAK+ MACRO PROFILE

The macro profile of Kyrgyz republic (B2 stable) in part reflects the small size of the economy, characterised by a lack of scale in key industry sectors and low per capita incomes, which limit its shock absorption capacity. The economy is also highly exposed to external shocks, as it relies substantially on trade with and remittances from Russia (Baa3 stable), as well as volatile domestic gold production. The global coronavirus outbreak weighs heavily on Kyrgyzstan economy and its banking sector, dragging down loan growth. Banks are primarily funded with customer deposits and funding and liquidity conditions will remain steady, supported by limited dependence on market funding, ample liquidity and gradual de-dollarization in the long term.

In January 2020, Bakai Bank merged with its sister bank- Kyrgyzstan based BTA Bank, which was previously acquired by Bakai Bank's shareholders from Kazakhstan based BTA Bank. As a result of the merger, Bakai Bank's market shares more than doubled.

BASELINE CREDIT ASSESSMENT

Bakai Bank's b3 BCA is constrained by: (1) macro-profile of Very Weak +; (2) modest profitability, which will remain under pressure amid worsened economic conditions and weakening asset quality and (3) potential challenges related to post-merger integration. At the same time the bank's BCA is underpinned by its robust capital levels, limited reliance on market finding, and ample liquidity buffer.

Moody's estimates that Bakai Bank's post-merger problem loans (defined as Stage 3 loans) accounted for around 4.1% of gross loans and loan loss coverage exceeded 100% of problem loans. Moody's, however, expects that problem loans will increase in 2020 because the slowdown in the economic activities in Kyrgyzstan as a result of the coronavirus outbreak will undermine borrowers' debt servicing capacity. This, in turn, will put pressure on the bank's solvency metrics, in particular asset quality and profitability.

Following the merger, Bakai Bank's capital position materially improved driven by highly capitalized BTA Bank. Moody's estimates that Bakai Bank's post-merger tangible common equity (TCE) ratio was around 18%, up from around 12% in 2019 and the rating agency expects the ratio to remain above 15% in the next 12-18 months.

Moody's expects that Bakai Bank's profitability will be strained by increasing loan-loss provisions and declining revenues amid worsened economic conditions and weakening asset quality. However, in the long run, Bakai Bank's profitability will benefit from increased scale of operations as a result of the merger with BTA Bank, which will help the bank to strengthen its operating efficiency and income generating capacity.

Bakai Bank's liquidity and funding profiles will remain stable over the next 12-18 months, supported by its ample liquidity buffer, which accounted for around 30% of total assets and limited reliance on market funding. Bakai Bank's funding base is highly dollarized which is typical for Kyrgyzstan banks.

Moody's does not have any particular governance concerns for Bakai Bank. The bank has not shown any material governance shortfall in recent years and its risk management framework is commensurate with its risk appetite.

Moody's assumption of a moderate likelihood of government support takes into account the bank's sizable post- merger market shares in Kyrgyzstan, however this support assumption does not result in any ratings uplift from the bank's BCA.

STABLE OUTLOOK

The stable outlook on Bakai Bank's long-term deposit ratings reflects Moody's view that the elevated risks stemming from the deteriorated operating conditions will be counter-balanced by the bank's ample liquidity and robust capital position. Thus, a likelihood of any rating changes for Bakai Bank in the next 12 to 18 months is limited.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Bakai Bank's deposit ratings will not likely be upgraded in next 12-18 months because of increased challenges amid unfavourable operating conditions related to the coronavirus outbreak. Negative pressure could be exerted on Bakai Bank if its financial fundamentals, notably asset quality, capitalization and profitability, were to deteriorate significantly beyond Moody's expectation as a result of material deterioration in economic conditions.

LIST OF AFFECTED RATINGS

..Issuer: Bakai Bank OJSC

Assignments:

.... Adjusted Baseline Credit Assessment, Assigned b3

.... Baseline Credit Assessment, Assigned b3

.... Long-term Counterparty Risk Assessment, Assigned B2(cr)

.... Short-term Counterparty Risk Assessment, Assigned NP(cr)

.... Long-term Counterparty Risk Rating, Assigned B2

.... Short-term Counterparty Risk Rating, Assigned NP

.... Short-term Bank Deposits, Assigned NP

....Long-term Bank Deposits, Assigned B3, Outlook Assigned Stable

Outlook:

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lev Dorf
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Nicholas Hill
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
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Client Service: 44 20 7772 5454

No Related Data.
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