We recommend to BUY ATF Bank’s senior unsecured Eurobonds maturing this May, and to HOLD itsperpetual subordinated Eurobonds.

Attractiveness of the bank’s Eurobonds maturing on May 11, 2016 is supported by short period until maturity (48 days) and high holding period return (4.7% or 35.6% annualized).

The recommendation to hold perpetual subordinated bonds reflects high coupon rate but low liquidity in comparison with the comparable bond issues of BCC and KKB banks.

9M2015 results

The banking system's profitability declined in 2015 due to economic deterioration and depreciation of national currency, which resulted in an increase of non-performing loans and high impairment losses. The ATF bank’s ability to generate revenues remains moderate.

Interest income increased by 19.9% yoy in 9M2015, while interest expense - by 16.7% yoy. As a result, net interest margin increased by 0.5 pp yoy to 3.0% and net interest spread increased by 1.0 pp yoy to 3.0% in 9M2015. The share of interest income received in cash decreased by 2.3 pp yoy to 81.2% in 9M2015.

The impairment losses were offset by the increase in the value of swap contract. The impairment losses amounted to KZT12.1 bn or 60.0% of net interest income. ATF Bank entered into the swap contract with National Bank of Kazakhstan in August 2014. Its value increased from KZT0.3 bn in December 2014 to KZT14.9 bn in September 2015 affected by transition to a floating exchange rate regime in August and following currency devaluation. According to the swap contract, ATF Bank agreed to provide KZT27.3 bn in exchange for $150 mn in August 2016. The increase in the value of swap contract also resulted in ROAE increase (by 12.0 pp yoy to 15.5%).

Asset quality

Asset quality in banking sector was weak in 2015. However, the ATF’s share of non-performing loans was higher in comparison with its peers in early 2015. We expect the share of non-performing loans to revert to the average levels in 2015 (approximately, 20%) given the high share of foreign currency loans (44.1% at the end of June 2015). Bank wrote down 12.7% of total loans as of December 2014 during 9M2015. Bank’s credit portfolio mostly consists of loans to corporate customers.

Ratings

On January 19, Fitch affirmed the long-term issuer default rating of ATF Bank at B-. This rating action reflects small volumes of outstanding wholesale trade debt, moderately improved liquidity, some ongoing performance improvement and moderately improved recovery prospects for some of its deeply impaired loans, accompanied by weak asset quality, capitalization, core profitability and significant foreign currency loan exposure.

On September 7, Moody’s downgraded senior unsecured debt ratings to Caa3 from Caa2 with a negative outlook. The rating action reflects the bank’s high exposure to foreign-currency lending, very high level of non-performing assets and weak buffers to absorb the expected increase in loan loss reserves and risk-weighted assets.

Last corporate events

On February 10, ATF announced the 100% utilization of the third tranche amounted to KZT3 bn within the government program to support small and medium-sized business in manufacturing industry. Bank funded 42 projects of such enterprises.

On February 12, ATF announced the KZT4,9 bn utilization under mortgage loans refinancing program (or 52.1% of the funds allocated under program) as of 1 January 2016.

ATF Bank holds the 6th place by the volume of assets among Kazakhstan’s banks (KZТ1404 bn, 5,7% market share). Banking and insurance holding company KNG Finance LLP controls 99,8% of shares.