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Bishkek (AKIpress) - Fitch Ratings says in a newly published report that the outlook for Kazakhstan's banks remains stable, as a generally supportive operating environment offsets challenges arising from still sizable problem legacy corporate loans, rapid growth in consumer lending and tighter sector liquidity.
The economic background remains broadly supportive for bank lending, in Fitch's view, given robust GDP growth (2014F: 5.5%), slightly improving economic diversification and moderate credit penetration, with net loans amounting to 27% of GDP, or 34% of non-oil GDP, at end-2013. However, corporate loan growth has been limited (12% in 2013), as many large banks remain primarily focused on work-outs of old exposures.
Problem loan recovery remains slow, due to deep-seated problems at many distressed borrowers, legal and tax impediments to loan work outs, and sometimes weak court enforcement of creditor rights and/or inefficient collateral foreclosures. Non-performing loans (overdue by more than 90 days) were a high 33.6% for the whole sector at end-February 2014, or 18.6% for non-restructured banks. Reserve coverage of these was 112% and 121%, respectively, and the sector capital ratio was a solid 18.4%. However, restructured loans are above 10% at most large banks, and recognising significant losses on these exposures would strain capital positions.
Rapid retail lending growth (27% in 2013) has supported sector profitability, with pre-impairment profit of non-restructured banks improving to a solid 5.3% of average assets in 2013 from 3.7% for 2012, and return on average equity rising to 13.6% from 11.1%. Although household lending is still a moderate 10.3% of GDP, the cost of servicing this debt is significant, in particular for lower-income borrowers, because of high rates and rapid amortisation. In Fitch's view, the newly adopted 50% regulatory ceiling on borrowers' payment-to-income ratios (effective from April 2014) should help to limit overheating risks in the sector, as may proposed measures to limit annual consumer loan growth and increase regulatory risk weightings.
The sector's funding profile has improved considerably over recent years as a result of deleveraging, debt write-downs by restructured banks, and deposit inflows. However, banks' liquidity management is complicated by significant deposit concentrations, a shallow domestic interbank market and limited refinancing possibilities with the National Bank of Kazakhstan (NBK). Potential risks were underscored in February 2014 as the devaluation of the tenge and an information attack on some banks caused a 6% retail deposit outflow, forcing the NBK to provide additional liquidity to the market.
Fitch believes that the 19% devaluation will likely have a further moderate negative impact on corporate loan quality, although a high proportion of foreign currency exposures has already been recognised as problematic, reducing the potential for additional deterioration. In addition, the regulator's attempts to avoid excess liquidity in the system (to prevent further pressure on the tenge) will be moderately negative for banking sector growth and profitability in 2014. However, the sector capital ratio barely changed as a result of devaluation, falling to 18.4% on 1 March from 18.6% at end-February, supported by the regulatory change of accounting for dynamic reserves; otherwise the ratio would have dropped to 18.0%.