COMMENT: Provisions seen enough to cover Kazakh banks' bad loans

By bne IntelliNews June 25, 2008

Renat Syzdykov of Visor Capital -

The Kazakh financial sector regulator reported that asset quality deterioration has been heaviest in the industrial and construction sectors, but lightest in the agricultural and telecommunication sectors. No significant share impact is expected for banks.

In June, Interfax, under the auspices of the Association of Financiers, held a round table conference to discuss ways to develop the Kazakh banking sector. All participants acknowledged that there has been a decline in banking activity since August 2007 and that the primary concern in the Kazakh banking sector is now asset-quality deterioration. Financial sector regulators, independent experts and top managers of commercial banks still view the situation in the Kazakh banking system optimistically. Experts asserted that commercial banks shouldn't depend on government support.

The Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations (AFN) believes that the downturn has been less significant than initially feared. Asset in the banking sector contracted by 2.1%, while loans edged down by 0.2% since the end of 2007. Most banks feel comfortable with the requirements set by AFN, despite the generally accepted view that local rules are stricter than international standards. AFN is not considering loosening the regulatory regime for banks.

National Bank (NBRK) Governor Anvar Saidenov noted that, while the first half has been tight for banks' liquidity, it should be the peak in terms of debt repayments. Commercial banks have still managed to repay their debt obligations, and should have no problems with future debt repayments. Commercial banks place deposits with NBRK at 5.5%; such deposits currently amount to KZT300bn ($2.5bn). The NBRK issues short-term notes on a regular basis with maturity of 28 days, and notes that there is generally strong demand for them. The last auction closed with volume of KZT102bn ($845m). The list of repo instruments has became broader - now even Eurobonds issued by banks' SPVs are accepted by the NBRK. Commercial banks assured that international financial markets are not closed for them. All participants believe that interest rates on foreign borrowings will not recover to attractive levels in the near term.

Deteriorating assets

Participants agreed that the primary concern in the Kazakh banking sector is asset quality deterioration. As of May 31, total overdue loans in the sector were at 9.9% according to data from the AFN. Current non-performing loans (NPLs) are at the level of 5.1%. AFN Chairperson Elena Bakhmutova highlighted that these NPL levels are not critical because banks have created enough provisions. Asset quality deterioration has been heaviest in the industrial and construction sectors, but lightest in the agricultural and telecommunication sectors. Commercial bank representatives noted that 18-20% lending rate is not affordable by many SMEs and that companies that have been granted such loans have been struggling to repay debts. Claims from banks against mortgage debtors has increased this year, with many debtors in rural areas not reacting to those claims and not repaying at all. Bankers suggested introducing new sanctions against bad debtors, including deducting the overdue amounts from debtors' pension accounts. Corporate depositors are concerned about write-offs of NPLs, even though banks claim that they do not expect significant write-offs this year.

Commercial banks want inflation to be better predicted by the NBRK. NBRK expects that inflation will start declining from September of this year. The NBRK announced that a final decision on lowering reserve requirements to 6% for foreign borrowings will be made at the upcoming NBRK Management Board meeting.

Overall, the discussion was healthy, but did not provide any significantly share-impactful information.

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