NPLs of Kazakhstani banks increased to 10.1% in Q1 – Fitch

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Fitch Ratings, international agency, has published a review of Kazakhstani banks for Q1 2017 with the key data of financial bank reports of the National Bank of Kazakhstan and Kazakhstani stock exchange.

According to the statement,  liquidity management was challenging for some banks in 1Q17 due to continued deposit withdrawals, in particular Delta Bank, whose deposits fell by 39%,AsiaCredit Bank (down 28%), Nurbank (down 18%) and Bank RBK (down 14%). Kazkommertsbank’s (KKB) deposits contracted by a moderate 7%. The system’s retail funding,adjusted for exchange rate changes, fell by 1.1%, while non-retail deposits added a mere 0.7%,highlighting at least a temporary cessation of previously large funding inflows.

The National Bank of Kazakhstan (NBK) provided liquidity to Delta to cure its default on local bonds and KKB to help it meet Eurobond repayments. Delta’s post-support liquid assets were at a low 3% of liabilities and KKB’s were at 9% at end-1Q17. Bank RBK (4%), Capital Bank (8%), and Eximbank Kazakhstan (12%) also had thin liquidity buffers. Fitch expects NBK’s liquidity support to be available to banks whose owners are ready to participate in such assistance and support these banks with more capital.

Loan growth was moderately positive despite funding instability, as non-retail loans added 0.8% and retail loans 0.6% in 1Q17, adjusted for exchange rate movements. Loan growth remains fragile, especially in the retail segment, but growth prospects have improved due to decreasing interest rates, lower inflation and a reduction in deposit dollarisation to 50% at end-1Q17 from 55% at end-4Q16.

Non-performing loans (NPLs) increased to 10.1% of sector loans at end-1Q17 from 8.6% at end-4Q16, partly as a result of the growth in overdue accrued interest. Fitch believes rapid changes in NPL ratios at most banks are unlikely in the near term, as lenders are likely to continue to classify significant problem loans as performing while preparing for the NBK asset-quality review, scheduled to start by end-2017. The exception may be KKB, where NPL recognition is likely to depend on external support made available.

Capital ratios continued creeping up in 1Q17 due to limited loan growth, earnings retention and appreciation of the tenge, resulting in a reduction in foreigncurrency risk-weighted assets. The sector aggregate Tier 1 and total capital ratios each improved by 0.7pp, to 14.9% and 17.0%, respectively. Capital ratios could suffer as a result of NBK’s recently proposed deduction from core capital, to be applied to potentially underreserved problem loans.

Profitability further weakened due to higher funding costs at stressed banks and foreign-currency losses at banks maintaining long currency positions. The sector annualised return on average equity fell to 11.5% in 1Q17 from 12.9% in 4Q16, while loan impairment charges were down to 1.5% from 2.9% of average loans. Eurasian Bank posted net losses of an annualised 26% of average equity. Sector results for the rest of 2017 may be significantly affected by the speed and timing of KKB’s reserve creation.

Fitch does not expect Tsesnabank’s acquisition of shares in Bank Centercredit in May to initially result in a deduction from the former’s core capital due to the specifics of the transaction structure. Prospects for the banks and their integration are likely to depend to a significant degree on actions to resolve asset-quality issues. The authorisation by KKB shareholders in May 2017 of issuance of 24 billion ordinary shares is an indication of groundwork being laid for a possible transaction with Halyk Bank, in Fitch’s view.