In a peer report on the six largest Kazakh banks, which account for 65% of banking sector assets, published on April 19, Fitch Ratings said that the economic slowdown in the country and a sharp devaluation of the national currency, the tenge, in the second half of 2015 had increased pressure on the banks’ credit portfolio. The banks are Halyk Bank of Kazakhstan (HB), Kazkommersbank (KKB), Tsesnabank, Subsidiary Bank Sberbank of Russia JSC (SBK), Bank Centercredit and ATF Bank.

The global crisis left Kazakhstan’s commercial banks with enormous debts following years of aggressive borrowing on global markets to fuel a property boom, which forced the government to bail them out as part of measures to prop up the ailing financial sector.

There has been progress since in solving the most acute problem of non-performing loans (NPL), the share of which as calculated by the National Bank of Kazakhstan fell from a peak of 31% in May 2014 to 8% at the beginning of 2016. However, the current crisis stemming from low oil and other commodity prices and the slowdown in the country’s major trading partners – Russia, China and the EU – is threatening Kazakhstan with a repeat of the situation.  

The share of NPLs is set to rise again as stagnating or even contracting GDP and the sharp depreciation of the tenge will lead to a deterioration in borrowers’ creditworthiness. State-owned or related companies are starting to delay their payments to contractors. This is further complicated by a weak payment culture and the falling disposable income of the population.

“Asset quality, while already undermined by significant deep-seated legacy problem loans in some banks, is expected to deteriorate due to significant foreign currency lending. However, Fitch expects that most large Kazakh banks will try to defer recognition of problems (helped by some flexibility in regulatory loan classifications) to limit provisioning due to modest capital buffers and limited core profitability,” Fitch said in a press release.

As a result of recently limited lending activity, liquidity remains robust at most of these banks, chiefly placed in dollar accounts with the National Bank of Kazakhstan. “Refinancing risk has reduced, reflecting past repayments of foreign debt, while strong political and business connections facilitate access to state funding sources for the large banks. However, further deterioration of some of the weaker banks could increase default risks for senior creditors, potentially leading to downgrades.”

The rating agency said most of the banks’ issuer default ratings (IDRs) were driven by their viability ratings, which are in the ‘b’ category. “This reflects their weak standalone profiles, with Halyk (rated 'BB' outlook stable) being a notable exception with better asset quality, moderate FX lending, and robust capital and profitability buffers. SBK's IDR is 'BB+' outlook negative, reflecting parental support prospects from Sberbank of Russia ('BBB-' outlook negative),” Fitch concludes.