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RATING SENSITIVITIES - KAF

RATING SENSITIVITIES - KAF 28.11.2013 The upgrade of KAF reflects a reassessment of its risk profile relative to that of its holding company, KazAgro (BBB/Stable). Fitch views the probability of support for KAF as high given its status as a core and material subsidiary of KazAgro. The company's ratings also factor in its small size (USD1.1bn of assets at end-H113), and hence the low cost of potential support, the track record of government-provided funding and capital and the company’s low leverage. Support would likely be made available to KAF by the Kazakh authorities (via KazAgro) as KazAgro would probably not have sufficient funds to provide assistance to any of its subsidiaries, in case of need. KazAgro’s recent USD1bn Eurobond issue included a cross-default clause, which references the company’s material subsidiaries, and defines these as entities accounting for more than 10% of either the assets or revenues of the consolidated group. KAF comfortably qualifies as a material subsidiary at present, comprising 24% of consolidated assets at end-1H13, which in Fitch’s view would be likely to provide an additional motivation to provide support to the company. At the same time, the current two notch differential between the KAF's foreign currency IDR and that of the Kazakh sovereign reflects (i) KAF's less prominent policy role as a development institution and lesser importance for the country's economy and financial system relative to other government-owned institutions in Kazakhstan, in particular DBK and Samruk-Kazyna (BBB+/Stable); and (ii) the company's indirect government ownership, which may in some scenarios impact the timeliness of support. KAF’s vulnerable asset quality and growth plans also mean that its leverage may over time increase significantly from the current low level. KAF's reported non-performing loans and leases amounted to a moderate 12% of the portfolio at end-3Q13, although the company’s single industry focus and the long tenors of exposures mean that downside risk for asset quality is significant. The equity/assets ratio was a high 55% at end-1H13, meaning that the company could create reserves equal to 58% of its loan/lease book before hitting its 12% total capital ratio covenant. Capital has been supported by regular injections. As a government agent, KAF does not have profitability targets. Internal capital generation is limited primarily because of impairment charges, although reported pre-impairment results are reasonable, supported by solid margins (bolstered by sizeable free equity funding) and moderate operating costs. KAF’s non-equity funding is dominated by borrowings from state-related entities (KZT77bn, or 68% of liabilities, at end-3Q13), mostly from KazAgro. Third party funding represented KZT19bn or 21% of liabilities, and the company targets an increase in funding from foreign banks (including for trade finance). Liquid assets comprised 8% of the balance sheet at end-3Q13, which is reasonable given limited near-term funding repayments. RATING SENSITIVITIES - KAF KAF’s ratings are likely be move in tandem with those of the sovereign and KazAgro. The ratings could be downgraded if the company’s financial profile deteriorates considerably as a result of asset quality deterioration or increased leverage, without support being made available. The rating actions are as follows: Long-term foreign and local currency IDRs upgraded to 'BBB-' from 'BB+'; Outlook Stable Short-term foreign currency IDR upgraded to 'F3' from 'B' National Long-term rating upgraded to 'AA (kaz)' from 'AA-(kaz)'; Outlook Stable Support Rating upgraded to '2' from '3' Support Rating Floor revised to 'BBB-' from 'BB+'

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