Fitch rates jsc halyk finance bb; outlook stable

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(The following statement was released by the rating agency) MOSCOW, July 25 (Fitch) Fitch Ratings has assigned JSC Halyk Finance (HF) Long term Issuer Default Ratings (IDRs) of 'BB' with Stable Outlook. A full list of rating actions is available at the end of this commentary. KEY RATING DRIVERS 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. 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. RATING SENSITIVITIES The IDRs of HF move in tandem with HB. A prolonged delay of support provision by HB, when required, could lead to a downgrade of HF's ratings. The rating actions were as follows: Long Term foreign and local currency Issuer Default Ratings assigned at 'BB'; Outlook Stable Short Term foreign and local currency Issuer Default Rating assigned at 'B'; Support Rating assigned at '3' Contact: Primary Analyst Roman Kornev Director +7 495 956 7016 Fitch Ratings CIS Ltd 26 Valovaya Street Moscow 115054 Secondary Analyst Evgeniy Konovalov Associate Director +7 495 956 9932 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.this site Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.this site Additional information is available on this site Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 31 January 2014, are available at this site. 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