London, December 14, 2022 -- Moody's Investors Service ("Moody's") today affirmed Bank CenterCredit's (BCC) B1 long-term local and foreign currency deposit ratings and changed the outlook on these ratings to positive from stable. Concurrently, Moody's affirmed the bank's b3 Baseline Credit Assessment (BCA) and Adjusted BCA, Not Prime (NP) short-term local and foreign currency deposit ratings, the bank's Ba3/NP long-term and short-term local and foreign currency Counterparty Risk Ratings (CRRs), Caa2(hyb) foreign currency junior subordinated debt rating and the Ba3(cr)/NP(cr) long-term and short-term Counterparty Risk Assessments.
Concurrently, Moody's upgraded BCC's long-term national scale bank deposit rating to Ba1.kz from Ba2.kz and its long-term national scale CRR to Baa2.kz from Baa3.kz.
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
Today's affirmation of ratings, and change in outlook to positive from stable reflects Moody's expectations that the bank will, in the coming months, be able to consolidate recent improvements in asset quality and solvency. The latter benefits from lower pressure from legacy problem loans due to increased provisioning coverage. Concurrently profitability has improved and will remain good.
The share of problem loans (defined as Stage 3 and POCI loans, according to IFRS 9 accounting standard) in the bank's gross loan book decreased to around 8% at end-Q3 2022 from 13% at end-2021 and 20% at end-2020. This reduction is attributable to the work-out of problem legacy loans and growth of better-quality loans (with lower cost of risk).
Moody's says that BCC has significantly improved its provisioning coverage of Non-performing loans, to an extent that is likely to be compliant with the requirements that the National Bank of Kazakhstan (NBK) imposed after the country's Asset Quality Review. This review was carried out by the National Bank of the Republic of Kazakhstan with the involvement of independent audit companies in 2020. Since then, BCC has significantly improved coverage of the remaining problem loans by loan loss reserves to 71% at end-Q3 2022 from 58% at end-2021. As a result, the risk for the bank's solvency stemming from the previously high uncertainty surrounding the future performance of legacy problem assets has substantially reduced: the share of problem loans relative to the sum of the bank's tangible common equity and loan loss reserves fell to around 41% at end-Q3 2022 from around 68% at end-2021 and 94% at end-2020.
Furthermore pressure on capital from repossessed collateral is also decreasing as the bank is gradually selling the collateral while its capital grows. At end-Q3 2022, repossessed collateral accounted for 26% of tangible common equity, down from 54% at end-2021.
Moody's expects that the bank will maintain good profitability in the next 12-18 months despite potential pressure from credit costs given the high interest rate environment and seasoning of the loan portfolio. During 2022, the bank acquired the Kazakhstan subsidiary of Russia's Alfa bank, whose loans account for around one third of the growth of BCC's loan portfolio during nine months of 2022. Lower pressure from the bank's legacy problem loan book on profitability, due to diminished need to create reserves, a higher share of performing loans and stronger non-interest income generated by growing the bank's franchise (also leveraging on Alfa Bank's franchise and distribution network) will support performance. During nine months of 2022, the bank reported net income to average assets at 6%. This metric will moderate to around 2% in 2023 due to absence of a one-off gain from acquisition of Alfa Bank and exceptional gains from FX transactions in 2022 but will remain significantly better than what was achieved by the bank in the past (around 1%).
The rating action also takes into account the bank's large buffer of liquid assets, which is strong and exceeded 43% of the bank's total assets at end-Q3 2022. Moody's expects that the bank will partially utilise its large liquidity cushion to finance its loan portfolio, but that this will remain robust at over 35% of total assets in the next 12-18 months.
The upgrade of the national scale ratings reflects improvements of credit metrics such as asset quality, solvency and profitability which position the bank more strongly within the national scale rating bands corresponding to the global scale ratings.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS
BCC's ESG Credit Impact Score is highly negative (CIS-4), reflecting the distinct negative impact of governance risks on the credit ratings. The bank's exposure to environmental and social risks has a limited impact on the ratings.
BCC faces high exposure to environmental risks, primarily because of its portfolio exposure to carbon transition risk as result of its lending to carbon-intensive industries or industries which are indirectly exposed to carbon transition risks. The important role played by hydrocarbons in the Kazakhstan economy increases the vulnerability to carbon transition risks.
BCC faces moderately negative exposure to social risks related to regulatory and litigation risk requiring the bank to meet high compliance standards.
BCC's exposure to governance risks is highly negative, reflecting its concentrated ownership, lack of independent directors on the board, elevated risk appetite as well as a history of requiring government aid or forbearance for creating adequate loan loss reserves.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While recognizing the ongoing reduction in problem loans, improvement in performance and good liquidity, Moody's notes potential risks from loan book growth and the quality of assets of the acquired Alfa Bank (11% of the loan portfolio at end-Q3 2022). The acquisition was completed quickly meaning that some risks could yet crystalise, impairing capital and profitability. Also, potential downside pressure from the operating environment is a source of some uncertainty over future asset performance, profitability and capital levels. Therefore, consolidating these improvements and maintaining good asset performance and profitability with a similar leverage ratio could lead to a rating upgrade.
The outlook on the bank's ratings could be reverted back to stable or the bank's deposit ratings could be downgraded in case of a sudden impairment of its assets and\or deterioration in profitability metrics, leading to capital erosion.
RATIONALE FOR THE POSITIVE OUTLOOK
The positive outlook reflects Moody's expectations that the bank's improved credit metrics will be maintained, demonstrating resilience to possible pressure from the operating environment and rapid asset growth. At the same time, any risks materialising after acquisition of Alfa Bank will unlikely significantly impair the bank's financial fundamentals.
LIST OF AFFECTED RATINGS
Issuer: Bank CenterCredit
..Affirmations:
....Long-term Counterparty Risk Ratings, affirmed Ba3
....Short-term Counterparty Risk Ratings, affirmed NP
....Long-term Bank Deposits, affirmed B1, outlook changed to Positive from Stable
....Short-term Bank Deposits, affirmed NP
....Long-term Counterparty Risk Assessment, affirmed Ba3(cr)
....Short-term Counterparty Risk Assessment, affirmed NP(cr)
....Baseline Credit Assessment, affirmed b3
....Adjusted Baseline Credit Assessment, affirmed b3
....Junior Subordinated Regular Bond/Debenture, affirmed Caa2(hyb)
..Upgrades:
....NSR Long-term Counterparty Risk Rating, upgraded to Baa2.kz from Baa3.kz
....NSR Long-term Bank Deposits, upgraded to Ba1.kz from Ba2.kz
..Outlook Action:
....Outlook changed to Positive from Stable
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Banks Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/71997. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in August 2022 entitled "Mapping National Scale Ratings from Global Scale Ratings Methodology". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.
The local market analyst for this rating is Vladlen Kuznetsov, +971 (569) 944-890.
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Mik Kabeya
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
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United Kingdom
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Client Service: 44 20 7772 5454
Henry MacNevin
Associate Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
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