OREANDA-NEWS. August 06, 2012. Standard & Poor's Ratings Services said it revised its outlook on Kazakhstan-based Kazkommertsbank (JSC) (KKB) to negative from stable. The 'B+' long-term and 'B' short-term counterparty credit ratings were affirmed, reported the press-centre of KASE.

The outlook revision reflects our anticipation that KKB's asset quality could weaken, notably if loan provisions remain low, reducing the capacity of the bank's earnings to absorb losses. KKB's high exposure to the risky real estate and construction sector weighs on our opinion of asset quality. In our view, before the economic crisis started in 2008, KKB demonstrated a higher risk appetite and weaker risk management practices than many of its Kazakh peers. Growth of new business has slowed in recent years, meaning that the bank's loan portfolio largely comprises loans originated before the crisis. Furthermore, loan repayment and recovery in Kazakhstan is weak in our view.

KKB's asset quality has deteriorated sharply since 2008, although at a slower pace in the first half 2012. According to regulatory data, loans more than 90 days overdue increased to 24.3% of total loans--about Kazakhstani tenge (KZT) 576 billion (USD 3.8 billion)--as of July 1, 2012, from 23.2% (KZT557 billion) at year-end 2011 and 19.3% (KZT453 billion) in 2010. This compares poorly with 18.8% for Halyk Savings Bank of Kazakhstan (BB/Stable/B) and 8.3% for JSC Bank CenterCredit (B+/Stable/B), as well as other rated midsize Kazakh banks. We believe KKB's nonperforming loans may increase further over the coming years, especially if the bank classifies some exposures secured by land as problematic.

KKB has a high concentration of lending in the high-risk real estate and construction sector, which was significantly affected by the economic crisis. Real estate prices have dropped by about 50% from their peak at midyear 2008 and market activity is now quite weak. At year-end 2011, 45% of KKB's loans were in housing construction, commercial real estate construction, and real estate, which compares with 24% for the system. We note that the value of land and property the bank holds as collateral has fallen substantially since 2008 and a further decline is possible. This would put additional pressure on the bank's asset quality.

We also note that 54% of the loan book was denominated in foreign currency at year-end 2011, which exceeds the system average of 44% and might increase KKB's credit risk in the event of unfavorable exchange rate movements. Consequently, we regard KKB's current provisioning of 24% of the loan portfolio as of Dec. 31, 2011, as low. In our view, there is a risk that provisions will be insufficient to cover the possible further deterioration  of asset quality.