S&P: Kazakhstan’s currency devaluation to add to credit risks in its banking sector

March 13. Trend

By Elena Kosolapova

S&P: Kazakhstan's currency devaluation to add to credit risks in its banking sectorWhile Kazakhstan’s recent local currency devaluation will not generally destabilize the economy, it will place additional pressure on the local banking sector, Standard & Poor’s Ratings Services said in report titled “Ripples From The Tenge Devaluation Will Add To Already High Credit Risks In Kazakhstan’s Banking Sector In 2014,” published on March 13.

The main challenge for Kazakhstan’s banking sector remains its disproportionately high stock of old nonperforming loans (NPLs; loans more than 90 days overdue) generated before the 2007-2008 global financial crisis, S&P said.

“NPLs were 32 percent of total loans in the system at year-end 2013, and we do not expect this to reduce materially in 2014. We also view the regulator’s announced NPL target of 15 percent (maximum) by year-end 2014 as very difficult to achieve unless efficient regulatory measures are introduced to substantially clean-up banks’ loan books,” the rating agency said.

Furthermore, S&P expects the tenge devaluation to place additional pressure on asset quality, especially for retail borrowers or corporate borrowers with no revenues in foreign currencies.

The agency expects to see some volatility and cyclicality in bank ratings in Kazakhstan, depending on developments in banks’ risk profiles and capitalization, and cannot rule out that downgrades could outpace upgrades. Negative rating actions would likely be driven by rapid asset growth or worsening asset quality, which could undermine banks’ capital buffers, as well as weakening liquidity.

That said, the agency expects competition in the Kazakh banking sector to stabilize in 2014 and build on previous years’ trends.

“We anticipate that market leaders will strengthen their positions in key segments. We also believe that banks with recent rapid loan growth will start showing improved profitability metrics, and that Russian-owned Kazakh banks will continue strengthening their foothold in Kazakhstan,” the agency said.

The National Bank of Kazakhstan devaluated its national currency from 155 to 185 tenge per one dollar on Feb.11.