Halyk Finance To Expand Share In IPO Of Kazakh State-Owned Energy Companies, Fitch Says

Baku, Azerbaijan, July 29



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Fitch Ratings has assigned JSC Halyk Finance (HF) Long term Issuer Default Ratings (IDRs) of 'BB' with Stable Outlook.



HF's Long-term IDRs are aligned with the ratings of its parent bank, Halyk Bank of Kazakhstan (HB; BB/Stable),reflecting Fitch's view of HB's high propensity to provide support to its subsidiary, if needed. Fitch classifies HF as a 'core subsidiary' according to the agency's 'Rating FI Subsidiaries and Holding Companies' criteria based on (i) HF's being an integral part of the group, wholly owned and supervised by the parent; (ii) significant reputational risks stemming from a potential default of the subsidiary; (iii) limited cost of potential support, Fitch said.



HF is the investment banking arm of HB, focusing on the group's core clients, which are Kazakhstan's leading corporates, banks, state-controlled entities, and also other group companies, such as HB's two 100%-owned insurance subsidiaries, for which HF manages securities portfolios. HF has been and plans to be increasingly involved in some of the group's flagship projects, such as the IPOs of Kazakhstan's state-owned energy companies.



Fitch believes HF would be supported by HB, if needed, although the company has never required support since establishment in 2004 due to sound performance. HF's small size (less than 1% of HB's total assets at end-2013 and 2.7% of net profit in 2013), its being almost fully funded by the parent bank and healthy balance sheet mean that the cost of any potential support would be low.



Reputational costs of a failure to support could be high in view of HB's full ownership, common branding and HB's supervision of HF through the Board of Directors. However, HF is not covered by a cross-default clause as per HB's public debt issuance terms due to the subsidiary's small size.



The company is well capitalised with an equity / assets ratio of 22% (54% including its preference share capital) at end-2013 and on the asset side exposed to decent quality securities (of the total KZT24bn book 41% were bonds rated 'BB' or above; equities, mostly of leading domestic issuers, amounted to 26% of the book) at end-1Q14. HF also had off balance sheet KZT133bn of brokerage accounts and KZT39bn of assets under management, which were mostly from related-party insurance companies.



HF's liquidity risk is currently limited as the company is funded by the parent on favourable terms and about a third of its securities book is represented by investment-grade bonds, which are repo-able on the market. HF does not currently provide margin loans or liquidity facilities to its brokerage and asset management clients. HF's management is seeking some funding diversification, which may increase the cost of funding.



Profitability has recently been strong with comprehensive income, equalling to 8.7% of average assets in 2013. It was mainly driven by proprietary investment portfolio income, the bulk of which was from coupons, while dividends and trading gains were not significant. Underwriting and advisory fees have had limited contribution to overall performance, but may increase in the future. Profitability is subject to volatility, as reflected by a small loss in 2011 caused mainly by securities mark-to-market adjustment, but such losses are typically unrealised.



The Kazakh Central Bank's official exchange rate is 183,52 KZT/USD on July 29.