Baku, Azerbaijan, April 9
By Elena Kosolapova - Trend:
International rating agency Fitch Ratings published new report 'Kazakh Banks: Legacy Problems, New Challenges' on April 9.
"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 report said.
The economic background remains broadly supportive for bank lending, in Fitch's view, given robust GDP growth (2014 forecast: 5.5 percent), slightly improving economic diversification and moderate credit penetration, with net loans amounting to 27 percent of GDP, or 34 percent of non-oil GDP, at end-2013. However, corporate loan growth has been limited (12 percent 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 percent for the whole sector at end-February 2014, or 18.6 percent for non-restructured banks. Reserve coverage of these was 112 percent and 121 percent, respectively, and the sector capital ratio was a solid 18.4 percent. However, restructured loans are above 10 percent at most large banks, and recognising significant losses on these exposures would strain capital positions.
Rapid retail lending growth (27 percent in 2013) has supported sector profitability, with pre-impairment profit of non-restructured banks improving to a solid 5.3 percent of average assets in 2013 from 3.7 percent for 2012, and return on average equity rising to 13.6 percent from 11.1 percent. Although household lending is still a moderate 10.3 percent 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 percent 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, according to Fitch. 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 percent retail deposit outflow, forcing the NBK to provide additional liquidity to the market.
Fitch believes that the 19 percent 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 percent on 1 March from 18.6 percent at end-February, supported by the regulatory change of accounting for dynamic reserves; otherwise the ratio would have dropped to 18 percent.
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