Azerbaijan, Baku, May 31 / Trend E. Kosolapova/
Kazakh banks are benefitting from the country's robust economic growth, which has provided opportunities for gradual resolution of asset quality problems, accumulation of moderate capital cushions and reserves, generation of new lending business and rebalancing of funding towards domestic sources, Fitch Ratings says in a newly-published report.
That said, the stock of legacy problem loans on banks' balance sheets remains large and in some cases may still be under-reserved, while improvements in earnings have been varied across the sector.
"Credit leverage has been notably reduced from pre-crisis levels, with net loans equal to a moderate 30 percent of GDP at end-2012 (56 percent relative to non-raw materials GDP). The largest banks have mostly shown limited growth or deleveraged during 2011-2013 to date due to legacy asset quality problems, limited new large-ticket business and in some cases lack of clear strategy from shareholders," Fitch said.
At the same time, several mid-sized players reported significantly higher growth rates (above 25 percent per annum), reflecting their lower level of legacy problems, lower base and/or retail focus.
The main growth drivers are largely limited to sectors benefitting from either direct support from the state (through subsidies to SMEs and agricultural borrowers) or connections to large corporates, both state-owned and private. Retail lending has also accelerated and is likely to remain robust in the near-term, considering still moderate household leverage.
Reported non-performing loans (NPLs; loans more than 90 days overdue) as a proportion of the total loans have been slightly down (to 30 percent at end-2012) owing to a small number of work-outs in large banks and pockets of resumed credit growth. However, notable downside risks still remain, particularly from the significant amount of restructured loans (estimated at 16= percent of the sector portfolio). Recovery in the real estate sector (to which the banks have been largely exposed) has been tepid, and cash generation even from completed properties remains so far limited.
Profitability metrics showed significant improvement in 2012, but not across the board. Six banks with returns on average assets of 1.9 percent or more accounted for three quarters of sector earnings (excluding BTA, Alliance and Temir), but only 40 percent of assets. The better performing banks were mainly those with fewer legacy loan problems and a greater focus on retail lending. Some of the largest banks have improved the quality of their earnings, narrowing the gap between interest income accrued and received in cash during 2012. However, legacy accruals on some banks' balance sheets were still sizeable, and in aggregate comprised almost 60 percent of sector equity.
The sector-wide balance sheet has been rather liquid due to moderate loan growth and increases in retail deposits. The net loans/deposits ratio has been comfortably maintained at around 100 percent, while external debt was equal to only 11 percent of liabilities at end-2012 (following the second BTA restructuring), suggesting low refinancing risks at most banks. At the same time, the quality of corporate funding was undermined by significant concentrations at the largest banks, which remain reliant on lumpy deposits from state corporations. Liquidity support from the National Bank of Kazakhstan is currently almost entirely limited to refinancing of failed banks, and a more flexible regime may be required, particularly as the state gradually reduces liquidity from the sector through bond issuance.
"The Viability Ratings of most Fitch-rated banks in Kazakhstan remain in the 'b' category, reflecting in most cases the still incomplete asset worked-outs, limited improvements in earnings generation and/or high concentrations on both sides of the balance sheets. Most ratings are currently on Stable Outlooks as Fitch does not expect a material change in the banks' credit profiles in the medium-term," Fitch said.
Exceptions are Halyk Bank ('BB-'/Rating Watch Evolving/'bb-'), which Fitch views as the strongest bank in Kazakhstan on a stand-alone basis, and BTA Bank ('CCC'/Rating Watch Positive/'ccc'/RWP) and Alliance Bank ('CCC'/'cc'), whose credit profiles continue to be undermined by large stocks of impaired loans and weak capitalisation and earnings. The near-term direction of Halyk's and BTA's ratings will depend primarily on the terms of any acquisition of BTA by Halyk, while Alliance's credit profile depends to a significant degree on whether state holding Samruk Kazyna is able to find a buyer for the bank by its end-2013 deadline.