FORTEBANK
This replaces a rating action commentary published on
Fitch Ratings has upgraded
A full list of rating actions is provided below.
Fitch has withdrawn Forte's Support Rating of '5' and Support Rating Floor of 'B-' as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on
Key Rating Drivers
IDRs and VR Upgraded: Forte's IDRs are driven by the bank's intrinsic credit strength, as reflected by the VR of 'bb-'. The upgrade of the ratings reflects a material reduction in legacy asset-quality risks in 2021-1H22, which has eased pressure on the bank's capital. It also reflects Forte's extended record of robust profitability through the cycle, which has boosted its capitalisation, as well as the bank's strong funding and liquidity profile.
External Shocks Manageable: Given Kazakhstan's strong trade and financial links with
Potential disruption in
Legacy Problems Materially Reduced: Impaired loans (Stage 3 and purchased or originated credit-impaired (POCI) loans under IFRS9) halved over the last year to 13% of gross loans at end-2021. This reduction was mainly driven by substantial write-offs and sales of legacy impaired mortgage and home equity loans as well as migration of some corporate exposures to Stage 2 from Stage 3. Rapid loan growth in 1H22 helped to further decrease the impaired loans ratio to 10% and Fitch expects it to remain around the same level in the medium term.
Forte's overall asset quality is supported by a limited share of net loans in total assets (just 39% of total assets at end-1H22). Non-loan assets mainly comprised the security book (37% of total assets, predominantly of investment-grade quality) and cash and balances with the
Growth Resumed: After four years of low growth (4% on average), Forte's loan book expanded 26% in 1H22 (not annualised). This growth was mainly driven by refinancing of loans from Kazakh subsidiaries of sanctioned Russian banks. We expect this spike in lending to be temporary and to moderate to 10%-15% within the next year. Forte's loan book is balanced between corporate and retail lending, with an increased focus on higher-margin unsecured cash loans, which should support the bank's profitability in the medium term, in our view.
Robust Performance: Forte has demonstrated strong performance over the cycle, with operating profit averaging 5% of risk-weighted assets (RWAs) in the last four years. The bank has maintained stable net interest margin of around 5% in recent years which, coupled with high operating efficiency (the cost-to-income ratio was 36% in 1H22), resulted in robust pre-impairment profit equal to 13% of average gross loans in 1H22 (annualised), up from 9% in 2021. This was comfortably above the loan impairment charges (2% of average loans in 1H22) providing the bank with strong loss absorption capacity through profit and a high return on average equity (33% in 1H22, annualised).
High Capital Ratios, Reduced Encumbrance: Due to strong profit generation, Forte's
Given recent write-offs of impaired loans, pressure on capital from legacy asset-quality problems has materially subsided, with net high-risk assets reducing to 0.3x of FCC at end-1H22 from 0.7x at end-2020.
Customer Funding; Ample Liquidity: Customer accounts are by far the main source of funding, accounting for a high 78% of total liabilities at end-1H22, complemented by state-related funding (another 11%). Wholesale debt is low (6% of total liabilities) and mainly comprises short-term repo obligations.
Forte benefits from a large cushion of highly-liquid assets (mainly balances with the NBK and investment-grade securities), which made up a high 50% of total assets and, net of planned repayments in the next 12 months, covered almost 70% of customer deposits at end-1H22.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Forte's VR and IDRs could be downgraded on material weakening asset quality or capitalisation. In particular, renewed asset-quality pressure, leading the net high-risk assets to exceed 0.5x of FCC could result in a downgrade.
In addition, downside rating pressure may result from a combination of weaker profitability, faster loan growth and large dividend distributions reducing the FCC ratio to 12%, which is a threshold for the 'b' implied category capital score under our criteria.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of Forte's ratings would require further material reduction in net problem assets relative to capital, coupled with some moderation of loan growth, and an extended record of strong profitability, and large capital/liquidity buffers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Forte's senior unsecured debt ratings are in line with the bank's Long-Term IDRs, reflecting average recovery prospects in case of default.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Changes to Forte's IDRs will be reflected in its debt ratings.
VR ADJUSTMENTS
No adjustments are needed to the implied VR scores.
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 '
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.
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, visitwww.fitchratings.com/esg.
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