RAM Ratings has downgraded the rating of Development Bank of Kazakhstan Joint-Stock Company’s (DBK or the Bank) RM1.5 billion Sukuk Murabahah Programme (2012/2032), from AA2/Stable to AA3/Stable. The rating action is

Published on 14 November 2016

RAM Ratings has downgraded the rating of Development Bank of Kazakhstan Joint-Stock Company’s (DBK or the Bank) RM1.5 billion Sukuk Murabahah Programme (2012/2032), from AA2/Stable to AA3/Stable. The rating action is in tandem with the downgrading of Kazakhstan’s sovereign ratings on the Malaysian-scale. DBK’s issue rating is equated to Kazakhstan’s credit standing given our expectation of a very high likelihood of support in times of need. The recent rating downgrade for the sovereign had been precipitated by persistently low oil prices and the country’s increased susceptibility to external conditions amid the recent change in its monetary policy, which has affected economic growth.

As a development financial institution, DBK’s loan book inherently carries higher credit risk as it finances large-scale, long-term infrastructure and industrial projects that include green-field developments. This results in high levels of borrower-concentration risk and non-performing loans. As at end-June 2016, the Bank’s gross impaired-loan ratio had jumped up to 8% (end-December 2015: 4%) amid its weak domestic economy. We expect DBK’s loan quality to remain pressured this year, given that the operating environment in Kazakhstan is likely to remain tough. The weak tenge could also exert pressure on the debt-servicing aptitude of DBK’s borrowers as the bulk of its lending is denominated in USD.

In view of the heightened credit risk as a result of the weak tenge, we view DBK’s capital position to be vulnerable. As at end-August 2016, the Bank’s tier-1 capital ratio slipped to 14.24% (end-December 2014: 20.30%). While a KZT20 billion capital injection from the Government of Kazakhstan (GoK) is under way and should be completed by end-2016, the Bank’s tier-1 capital ratio is only expected to be lifted slightly to 14.91%. Nonetheless, the GoK has been firmly backing the Bank, particularly through numerous capital infusions between 2009 and 2014, apart from ongoing funding support. DBK also has a sound liquidity position, as reflected by its average Basel III liquidity coverage ratio of 106.5% (minimum: 76%; maximum: 155%) in 2016, although it still relies heavily on wholesale borrowings.

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