Moody’s: Negative outlook for Kazakhstan’s banking system maintained

July 12. The FINANCIAL 

Moody's: Negative outlook for Kazakhstan's banking system maintainedThe negative outlook for credit conditions in Kazakhstan’s banking system is maintained based on the poor provisioning and under-capitalisation of the Kazakh banks, their subdued loan origination and lack of access to the wholesale capital markets, says Moody’s Investors Service in its new Banking System Outlook on Kazakhstan.

While the economic environment for Kazakh banks is showing signs of improvements – the agency expects GDP growth of 2.8% this year, up from 1.2% last year – the Kazakh banking system remains vulnerable. “The loan loss provisions-to-loans ratio was 14% at the end of Q1 2010, which Moody’s considers to be far below what will be needed according to its projections. Moody’s expects that loan losses will ultimately reach 24% of gross loans,” explained Armen L. Dallakyan, lead analyst for Kazakh banks in Moody’s London office, and author of the report.

The agency’s estimate is based on (i) its current problem-loan estimate of 40% of gross loans; and (ii) its expectation that for most problem loans, ultimate losses will reach 60% of the outstanding balances (principal plus accrued interest).

Moody’s expects banks’ earnings generation capacity to remain constrained as new lending will be subdued. In near term, the banks’ ability to growth their loan book will be hindered by weak demand and the limited number of borrowers with good credit profiles. Borrowers across all market segments are in the process of deleveraging, and despite some positive economic signs this year, Moody’s anticipates a slow recovery in corporate profitability, real-estate market conditions and household income.

In addition, the liquidity positions of some large banks are vulnerable as they are significantly dependent on short-term funds from a handful of state and quasi-state entities

Mr Dallakyan added: “The capital markets remain effectively closed for most Kazakh banks. Several of the large banks, which were historically funded primarily by foreign capital markets, are now refinancing their maturing market debt with large deposits from the government and a few government-owned companies, mainly commodities exporters. Moody’s believes that this arrangement provides only a temporary fix to banks’ funding problems. Over time, this approach will have to be substituted by more granular and diversified sources of funding if the banks are to achieve more sustainable liquidity positions and develop a funding base that can support their long-term growth.”’s%3A_Negative_outlook_for_Kazakhstan’s_banking_system_maintained/