Fitch Ratings has affirmed Kazakhstan-based JSC AB Bank of China Kazakhstan's (BOCK) Long-Term Issuer Default Ratings (IDRs) at 'BBB+'.

The Outlook is Stable.

Fitch has withdrawn BOCK's Support Rating as it is no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated Criteria, we have assigned BOCK a Shareholder Support Rating (SSR) of 'bbb+'.

Key Rating Drivers

IDRs Driven by Shareholder Support: BOCK's IDRs are driven by Fitch's view of a high probability of support from the parent bank, Bank of China Limited (BOC, A/Stable/bbb), as reflected in the 'bbb+' SSR. In turn, BOC's IDRs are driven by a very high likelihood of support from the government of China (A+/Stable). We believe that state support available to BOC would also likely be extended to BOCK, in case of need.

Shareholder Support Factors: Fitch's view of a high probability of support from BOC is based on full ownership, high levels of management and operational integration between the parent and the subsidiary, significant reputational risks for BOC in a case of the subsidiary's default as well as low cost of potential support given BOCK's small size relative to the parent's (below 0.1% of BOC's assets at end-3Q21).

Country Ceiling Constraint: BOCK's Foreign-Currency IDR (two notches below BOC's IDR) is constrained by Kazakhstan's Country Ceiling of 'BBB+', which captures transfer and convertibility risks and the risk that the subsidiary may not be able to benefit from parent support to service its own foreign-currency obligations. The bank's Local-Currency IDR also considers Kazakhstan's country risks.

Short-Term IDRs, National Rating: BOCK's 'F2' Short-Term IDRs, the lower of two possible options mapping to a Long-Term 'BBB+' under Fitch's criteria, due to the bank's Long-Term IDRs being constrained by the Country Ceiling. 'AAA(kaz)' National Long-Term Rating reflects Fitch's view that BOCK ranks among the strongest credits in Kazakhstan.

Viability Rating Not Assigned: Fitch did not assign BOCK a Viability Rating (VR) because we view the bank as a deeply integrated subsidiary. It has a limited commercial franchise and is heavily reliant on the parent bank in business origination and risk management. Operational integration between the subsidiary and the parent is significant as BOC's management controls all strategic decision-making at the subsidiary level. Under Fitch's criteria, deeply integrated subsidiaries are usually not assigned VRs.

Liquid Assets, Good Loan Quality: BOCK's assets mainly comprise liquid assets, which totalled a high 88% of total assets at end-3Q21. These included cash, short-term placements in the National Bank of the Republic of Kazakhstan and BOC Group (74% of total assets) and holdings of Kazakh sovereign bonds (another 14%). The loan book made up a small 11% of assets at end-3Q21 and featured short- to medium-term exposures to local corporates, including those with Chinese participation. BOCK had no impaired loans at end-3Q21 as the bank has worked out all its legacy exposures.

Good Profitability: BOCK's below-market funding costs (below 1% in the last four years) and limited loan impairment charges (0.3% of average gross loans in 12 months to end-3Q21), drive healthy profitability. Return on average equity amounted to 15% in the same period.

High Capitalisation: BOCK's regulatory Tier 1 and Total capital ratios both equalled a high 106% of risk-weighted assets at end-3Q21, one of the highest among Kazakh banks. Capitalisation is supported by its low-risk asset structure and an extended record of profit retention.

Concentrated, Stable Customer Funding: Low-cost customer accounts made up a high 98% of total liabilities at end-3Q21, comprising predominantly current accounts by Chinese companies or local entities with links to China. Customer concentration is high, with the 20-largest accounts making up 89% of total customer funding at end-2021, although these balances have been very stable in recent years. BOCK's liquidity fully covered customer accounts at end-3Q21.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A downgrade of BOCK's IDRs would follow a downgrade of the Country Ceiling. Ratings could also be downgraded in case of (i) a multi-notch downgrade of BOC's IDRs; (ii) sale of the bank to a lower-rated owner; or (iii) Fitch's view of a weakening propensity of BOC to support its subsidiary. However, none of these scenarios is currently viewed as likely by Fitch.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

BOCK's IDRs and SSR could be upgraded if Kazakhstan's Country Ceiling is upgraded.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

BOCK's IDRs are driven by potential support from BOC.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

JSC AB Bank of China Kazakhstan

LT IDR

BBB+

Affirmed

BBB+

ST IDR

F2

Affirmed

F2

LC LT IDR

BBB+

Affirmed

BBB+

LC ST IDR

F2

Affirmed

F2

Natl LT

AAA(kaz)

Affirmed

AAA(kaz)

Support

WD

Withdrawn

2

Shareholder Support

bbb+

New Rating

Page

of 1

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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