Fitch Ratings-Moscow/London-18 December 2017: Fitch Ratings has upgraded Basisbank’s (Basis) Long-Term Issuer Default Rating (IDR) to ‘B+’ from ‘B’ and affirmed Cartu Bank’s (Cartu) and Halyk Bank Georgia’s (HBG) IDRs at ‘B+’ and ‘BB-‘, respectively. Fitch has revised the Outlook on Cartu to Negative from Stable. The Outlooks on Basis and HBG are Stable.
Fitch has also upgraded Basis’s Viability Rating (VR) to ‘b+’ from ‘b’ and affirmed Cartu’s VR at ‘b+’. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
IDRS, VIABILITY RATINGS (VRs)
Basis’s and Cartu’s IDRs are driven by the banks’ standalone creditworthiness, as expressed by their VRs.
The upgrade of Basis’s Long-Term Foreign Currency IDR reflects the upgrade of the bank’s VR. The latter captures the bank’s extended track record of profitable growth, while maintaining reasonable asset quality metrics and a solid capital cushion.
The affirmation of Cartu’s ratings and revision of the Outlook to Negative factors in the pressures the bank faces as a result of deteriorating asset quality, which could also negatively impact performance and capitalisation.
Basis’s and Cartu’s VRs also consider high loan dollarisation levels (end-3Q17: 68% and 71%, respectively), sizeable balance sheet concentrations, the risks associated with largely unseasoned loan books after recent rapid growth and franchise limitations. The ratings also factor in both banks’ reasonable profitability metrics, sizeable equity cushions and moderate refinancing risks.
HBG’s IDRs are driven by the potential support it may receive, if needed, from its sole shareholder Halyk Bank of Kazakhstan (HBK, BB/Stable). The one-notch differential between HBK’s and HBG’s IDRs reflects the cross-border nature of the parent-subsidiary relationship, and the so far limited track record and contribution of the Georgian subsidiary to overall group performance. The Stable Outlook on HBG mirrors that on the parent.
Fitch has not assigned a VR to HBG because of its high management and operational integration with HBK and significant reliance on parent funding.
At end-1H17, Basis’s non-performing loans (NPLs, overdue more than 90 days) remained low at 2.2% of loans, fully covered by reserves. Performing restructured loans contributed a further 4.4% of loans (13% of equity) and were weakly provisioned. Regulatory impaired loans (the bottom three risk categories) were broadly stable, at 4.5% of loans at end-3Q17, and almost fully covered by reserves. High FX lending, mostly to unhedged borrowers, and large borrower and sector concentrations heighten the bank’s risk profile. At end-1H17 the largest 25 groups of borrowers amounted to a sizeable 50% of loans or 1.5x equity. The bank’s lending growth was very rapid at 54% on average in 2014-2015, but moderated to 21% in 2016-1H17.
Profitability metrics have been good, supported by still wide margins, although these are decreasing due to high competition, and growing economies of scale. Low risk costs (the annualised loan impairment charges/average gross loans ratio was 1% in 9M17, according to regulatory accounts) also support the bottom line, with solid annualised ROAA and ROAE of 2.4% and 13.1%, respectively, in 9M17 (2016: 2.9% and 15.4%). We expect Basis’s profitability will continue to benefit from lending growth, while asset quality trends remain key to performance.
The capital cushion is solid. At end-2016 (the date of the latest available IFRS accounts) the Fitch Core Capital (FCC) ratio was a high 24%. The regulatory Tier 1 capital adequacy ratio was adequate at 15.3% at end-3Q17 (reflecting the high 175% risk weight applied for loans denominated in foreign-currency loans), allowing the bank to additionally reserve up to 10% of gross loans without breaching the minimum required regulatory capital ratios.
Customer funding (66% of total liabilities at end-3Q17) is generally stable, albeit highly concentrated – top 10 groups of depositors comprised a sizeable 59% of total customer accounts. Related-party funding was 11% of liabilities. Non-deposit funding was mainly in the form of term loans from IFIs (24%) with limited refinancing risks on these. At end-3Q17, liquid assets (mainly cash and equivalents, but also a portion of unencumbered securities) covered 45% of customer accounts.
NPLs at Cartu grew to 12.9% of end-1H17 loans from 11.7% at end-2016, covered 82% by reserves. These were mostly from the corporate lending segment and included legacy exposures originated in 2011 (43% of the total NPLs). Regulatory impaired loans grew to a large 33% at end-3Q17 from 22% at end-2016 and reserve coverage was a modest 42%. Regulatory impaired loans captured most of the major exposures, which Fitch has identified to be of higher risk, mainly due to the borrowers’ weak or deteriorating financial profiles. These exposures represented 30% of loans or, net of specific reserves, were equal to 1.3x of end-3Q17 equity.
Cartu’s lending remained highly concentrated. At end-1H17, exposure to the top 25 groups of borrowers made up 57% of total gross loans (equal to 2.5x equity); the largest construction and real estate segment accounted for 21% of loans. The bank’s recent credit growth was rapid at around 45% on average in 2014-2015 but slowed sharply to around zero on average in 2016-1H17.
Profitability metrics are reasonable, with annualised ROAA and ROAE of 1.4% and 7.9%, respectively, in 9M17. Loan impairment charges were equal to a relatively high 3% of average gross loans in 9M17 (annualised) although recoveries from previously written-off loans have underpinned the net results. We expect that provisioning requirements will remain high given weakening asset quality and large unreserved problem assets that will keep performance under pressure.
Cartu’s FCC ratio was a solid 19% at end-2016. The regulatory Tier 1 capital adequacy ratio stood at a lower 11.4% as of end-3Q17, allowing the bank to create additional reserves equal to a moderate 7% of loans. Subordinated debt contributed by the shareholder, equal to 13% of risk-weighted assets, could help protect senior creditors in case of erosion of the bank’s core capital. However, Fitch has not notched up the bank’s Long-Term IDR (which captures default risk on senior obligations) from the VR (which reflects failure risk) due to significant uncertainty about recapitalisation needs in case of failure.
Customer funds (77% of liabilities) are highly concentrated and could be volatile. The top 10 groups of depositors comprised 47% of total customer funding. Wholesale funding has been low. The liquidity cushion is reasonable: at end-3Q17, liquid assets (mainly cash and equivalents, but also a portion of unencumbered securities) covered around 45% of Cartu’s total deposits.
SUPPORT RATINGS AND SUPPORT RATING FLOORS
Basis and Cartu’s Support Ratings of ‘5’ and Support Rating Floors of ‘No Floor’ reflect the two banks’ limited systemic importance, and consequently Fitch’s view that state support cannot be relied upon. Potential support from the private shareholders is also not factored into the ratings, as it cannot be reliably assessed.
HBG’s Support Rating of ‘3’ reflects the moderate probability of support from HBK.