Temirbank demonstrated improved core profitability with positive preprovision income as of year-end 2011 and in the first half of 2012. Therefore, S&P are removing their one-notch negative adjustment for poor earnings capacity. The increase in core earnings was mainly thanks to a restored net interest margin, which had increased to 2.9% as of midyear 2012 from 1.3% at year-end 2010, owing to new loans granted. S&P expect this positive trend to continue throughout the rest of 2012-2013, with a more active resumption of new lending. However, accrued interest income still exceeds the income actually paid because of the remaining high portion of problematic assets. Nonperforming loans (NPLs; overdue more than 90 days) amounted to 43.9% on June 30, 2012. Net profit benefits from net recovery in provisions, reflecting continuous write-backs on legacy assets, which balances new provisioning needs. Net profit also benefits from gains from Temirbank’s repurchase of its own debt securities.

The bank’s equity was adjusted for sizable tax loss carryforwards, which comprise a significant part of common shareholder’s equity (around 20%). As a result, RAC before diversification at year-end 2011 amounted to 9.8%. S&P forecast it will be at about 9% within the next 12-24 months. This projection takes into account planned 10%-15% loan growth, positive retained earnings, and no dividend payouts. They have consequently revised their capital assessment downward to adequate (range of 7%-10%) from strong (above 10%).

The ratings on Temirbank reflect the bank’s moderate business position, adequate capital and earnings, weak risk position, average funding, and adequate liquidity, as our criteria define these terms. The stand-alone credit profile (SACP) is now b-.

S&P classify Temirbank as a government-related entity (GRE). In Their opinion, there is a moderate likelihood that Kazakhstan’s government would provide timely and extraordinary support to Temirbank in the event of financial distress. In accordance with their criteria for GREs, S&P based this opinion on:

• The bank’s strong link with the government through its 79.9% shareholder, Samruk-Kazyna (BBB+/Stable/A-2; Kazakhstan national scale kzAAA). The bank is currently one of the governments largest investments in the financial sector.
• Temirbank’s limited importance to Kazakhstan’s economy because the bank has a small market share and does not provide a public service or function that other domestic banks could not readily undertake.

Based on these factors, and according to S&P’s criteria, the long-term rating on Temirbank benefits from one notch of uplift above its b- SACP.

The CCC+ rating on Temirbank’s dated subordinated debt bank note program is two notches below the final issuer credit rating of B, in accordance with S&P’s criteria for nondeferrable capital instruments.

Outlook

The stable outlook reflects S&P’s expectation that Kazakhstan’s government will continue to provide support to Temirbank as the bank cleans its loan book and diversifies its funding base. Given the amount of problem loans the bank has, S&P expect NPLs to decline only gradually over the next 12 months.

If S&P perceived that the government’s stance toward the bank is no longer consistent with a moderately high likelihood of support, they would remove the one notch of uplift that they currently factor into the ratings. They could also consider lowering the ratings if they observed further deterioration in asset quality in the next 12 months. This could happen if the quality of newly originated loans were weak, reflecting relaxed underwriting practices. At the same time, a potential merger with weaker Alliance Bank JSC (B-/Stable/C; Kazakhstan national scale kzBB-) could worsen the risk profile of the newly formed entity. However, S&P see this merger as a long-term process and don’t currently factor its impact on our ratings and outlook on Temirbank.

S&P could raise the ratings if Temirbank demonstrated a significant and sustainable improvement in asset quality, with a material reduction in problematic assets, which would improve its risk position. An improvement in capitalization, with RAC above 10% caused by earnings growing faster than risk-weighted assets, could be positive for the ratings, as well.