Moody’s leaves negative outlook on Kazakhstan’s bank system unchanged

June 5. KASE

Moody's leaves negative outlook on Kazakhstan's bank system unchangedThe outlook for Kazakhstan’s banking system remains negative, unchanged since October 2008, says Moody’s Investors Service in a new report published today. The outlook reflects the rating agency’s view of the banking system’s large overhang of problem loans, insufficient loan-loss reserves, its poor profitability and capital adequacy and limited credit growth.

The new report, entitled “Banking System Outlook: Kazakhstan”, is now available on Moody’s subscribers can access this report via the link provided at the end of this press release.

Although the operating environment in Kazakhstan is relatively stable, Kazakh banks derive little benefit from the growing economy, as the better-performing industries (large state-owned energy and mining companies) do not borrow from domestic banks. As a result, Moody’s expects modest credit growth of 5% (in real terms) in 2013, pressured by limited credit demand from the non-commodities companies.

Weak asset quality and capital adequacy will remain a key credit challenge for the banking system over the outlook period. Moody’s expects problem loans to decline only marginally from its estimate of 40% of gross loans as of year-end 2012. The rating agency’s scenario analysis indicates that banks need to create additional loan-loss provisions equal to about 6% of gross loans to fully cover expected losses, which could push the system’s total capital adequacy ratio down to 12.5% (modestly above the 12% regulatory minimum) in the next 12-18 months, from 14.9% at year-end 2012.

Moody’s expects the system-average return on average assets (RoAA) to remain weak, in the 0.5%-1% range over the outlook period, pressured by low earnings and significant loan loss provisions.

Banks have improved their funding and liquidity structures, supported by increasing customer funding, limited lending growth and reduced market borrowings. However, Moody’s note that some large banks are highly dependent on large corporate deposits (many of which are from state-controlled entities), which represents an important refinancing risk.

Moody’s sees a very low probability that the government would extend support to banks’ bond holders, as evidenced by the bail-ins of a few large failed banks in the past several years. However, depositors of large banks are still likely to receive moderate systemic support, which results in bank deposit ratings exceeding those institutions’ senior unsecured debt ratings.