S&P Lowers Rtgs On 2 Kazak Banks; Otlks Still Negative.

LONDON--(BUSINESS WIRE)--Standard & Poor's CreditWire 10/12/98-- Standard & Poor's today lowered its long-term counterparty credit rating on Halyk Savings Bank of Kazakhstan to single-'B' from single-'B'-plus. The short-term counterparty credit rating is affirmed at single-'B'. At the same time, Standard & Poor's lowered its long-term counterparty credit rating on JSC Kazkommertsbank to single-'B'-minus from single-'B'-plus and its short-term counterparty credit rating is lowered to single-'C' from single-'B'. The senior unsecured rating on Kazkommerts International BV's $100 million notes due 2001, guaranteed by JSC Kazkommertsbank, are also lowered to single-'B'-minus from single-'B'-plus. The outlook on both banks remains negative.

The lowering of the ratings reflects a number of factors, including the economic crisis that is currently hitting Kazakhstan (local currency double-'B'-minus/Negative/single-'B', foreign currency single-'B'-plus/Negative/single-'B') together with the effect on the economy of the Russian economic and political crisis. These two factors will inevitably make the already fragile, transitional environment for the rated Kazak banks much more difficult. The persistently low oil and commodity prices have already impacted the Republic and led to budgetary revisions and cuts in 1998. Although oil and gas and metallurgy are not dominant components of Kazakhstan's GDP, they are important sectors for the banks' lending, both directly and indirectly (for example, trading companies). It should be added, moreover, that both banks' direct exposure to Russia is very modest.

Standard & Poor's fully recognizes the progress that the Kazak authorities have made in the regulation and supervision of Kazak banks, and the contrast between Kazakhstan and Russia in this respect is underlined. The banking system is beginning to cluster around five major domestic institutions: Halyk Savings Bank of Kazakhstan, Kazkommertsbank, TuranAlem Bank, CenterCredit, and Temirbank. The Central Bank of Kazakhstan, in an attempt to strengthen the banking system, gradually has put pressure on weaker institutions to merge or be liquidated by increasing their capital requirements. Banks also are required to move to international accounting standards. Loan classification policies are relatively tough by emerging market standards.

For Halyk Savings Bank, the lowering of the rating also reflects a deterioration in the bank's fundamentals, balanced by the express and implied support by the Kazak authorities for the bank. Halyk Savings Bank's asset quality indicators are very volatile and sharply declined in the first half of 1998. In a loan book notable for its concentrations and for a sizable level of government directed lending, Halyk Savings Bank is particularly heavily exposed to the oil and gas industries, where Standard & Poor's expects cash flow strain in the coming months. Concurrently, the bank's maturity mismatch position has deteriorated, since the bank must short fund longer term assets. The bank's performance is poor. These negative factors are somewhat balanced by Halyk Savings Bank's key role as the only bank with a truly national network in Kazakhstan; the fact that it holds two-thirds of the country's deposits; and its close relationship with and majority ownership by the Kazak government, since Halyk Savings Bank is often the only means through which the government can carry out many of its payments and financing programs.

For Kazkommertsbank, the lowering of the rating also reflects the change in strategy, seen in the past year, away from that of a commercial bank to more closely resemble a financial-industrial group. That aside, Kazkommertsbank has made good progress in developing its commercial banking franchise in the past 12 months and its staff are considered to be above average. Standard & Poor's believes, however, that the bank's capital position has been compromised by its ownership of and involvement in several industrial companies such as Kazakhtelecom and Shymkent Oil Refinery. The bank does not have the capital to support the risks of ownership of such investments and preserve a commercial banking business in a difficult transition environment. Standard & Poor's also expects the bank's liquidity to tighten in the coming months as external financings are repaid.

OUTLOOK: NEGATIVE Though there has been greater pressure on both the Kazak tenge interest rates and the exchange rate since ratings were assigned last year, Standard & Poor's considers that the Kazak banking and financial system has been somewhat protected during this period of difficulties because it is relatively undeveloped and already rather illiquid. The ratings do incorporate the risks of rapid growth and potential volatility, as well as the expectation of support from the Kazak authorities. However, Standard & Poor's considers that a negative outlook reflects more appropriately the increasingly unfavorable climate in which the banks are working. --- CreditWire