Fitch Affirms Slow Economic Growth To Exert Pressure On Kazakh Banks

Fitch Rates Kazakhstan's Real Estate Fund Samruk-Kazyna 'BB+'; Outlook Stable

Slower economic growth and the recent depreciation of the tenge will continue to exert pressure on Kazakh banks’ asset quality and capitalization in 2017, Fitch said in its 2017 outlook on CIS and Georgian banks.

Fitch expects GDP growth to pick up to a moderate 2 percent in 2017 (0.4 percent in 9M16) in Kazakhstan, but driven by higher oil production and energy investments rather than a broader recovery in economic activity.

The sector’s NPL ratio was a moderate 7.8 percent at end-3Q16, but large additional risks stem from restructured/distressed exposures and FC lending, according to Fitch. Fitch expects most lenders will continue to enjoy flexibility in the timing of problem recognition and provisioning, and some restructured loans could start performing.

“The stabilization of the economy, potentially supported by appreciation of the tenge and continued local-currency funding inflows, could help boost lending volumes in Kazakhstan after more than two years of sluggish loan growth,” the rating agency said.

Fitch expects the stock of loans to add 2-3 percent in 2017 compared with a near-zero expansion in 2016 (0.2 percent in 9M16). However, purchases of NBK notes may prove more attractive than lending in the near term given the growing issuance volumes, longer tenors and attractive yields on these, Fitch said.

Fitch believes most Kazakh banks’ capitalization will remain vulnerable in 2017 (Halyk excepted), considering moderate provisions on distressed loans, downside risks from FC lending and the lack of measures to clean up balance sheets.

Slow loan growth, significant new funding inflows and gains from currency risk hedging with the NBK resulted in many banks having significant liquidity buffers, which Fitch expects them to largely retain in 2017 (partly investing these in NBK notes).

Fitch noted that dollarization remains high, but local-currency liquidity has improved as a result of a moderate reduction in foreign-currency deposits to 58 percent at end-3Q16 (end-2015: 69 percent), partially driven by exchange-rate stabilization. Moderate near-term foreign debt maturities should make refinancing risks manageable in most cases, the rating agency said.

Ratings could be downgraded if asset quality and capital weaken at individual banks to an extent not compatible with their already low ratings. More decisive regulatory action to resolve banks with weaker solvency could also result in downgrades.

Strengthening of loan provisioning levels and the further stabilization of the economy would reduce risks to banks’ performance and ratings.