GLOBAL RATING: Liquidity crisis slows growth of Kazakh banks

By bne IntelliNews January 30, 2008

D.V. Rybalkin of KzRating -

Kazakhstan's banking sector is one of the most important and dynamic components of the national economy. As of July 1, 2007, the banking sector's combined assets totaled KZT11.1378 trillion (€58.8bn), up 25.9% from the start of the year.

The banking sector's level of penetration in the economy (about 90% of GDP) is comparable to European markets. External funding is one of the main growth factors of the banking system.

The global liquidity crisis was unexpected for the Kazakh banking system. Limited access to international capital markets could have been severe, considering the large share of foreign funding in accumulated reserves.

The Kazakh banking system has managed to cope with the negative consequences of the global liquidity crisis. The main qualitative indicators (capital adequacy and liquidity) of the overall banking industry, are adequate. However, domestic resources are not sufficient to maintain the recent growth rate. Thus, foreign funding remains the main growth factor in the long term.

Maintaining the liquidity necessary to pay off short-term loans, especially during the global liquidity crisis, has led to slower growth in the banking system. A number of banks have curtailed their credit programmes to consolidate assets and pay off current liabilities.

The main goal now is to develop and adopt new strategies in accordance with the new market infrastructure. One of the new approaches could be intensive (increasing quality) rather than extensive development, stimulating demand for banking services from medium and large businesses.

Banks are switching to short-term loans to insure fast asset turnover and to maintain liquidity in order to pay off external loans. The retail loan market is growing while corporate loans are declining. The share of consumer loans is increasing, while mortgages are declining, which caused lower demand in the construction sector and a sharp decline in real estate prices. The cross-border expansion of Kazakh banks is expected to slow down due to a lack of excessive liquidity.

The amount of overdue loans in the loan portfolio is not critical, but can contribute to instability in the medium term. Due to large construction loans a slow down in the construction sector due to lower mortgage financing rates has affected some banks' balance sheets.

Political risk is insignificant in the medium term since the president can be reelected an unlimited number of times. Long-term risk remains high due to the lack of a power transfer system in the country.

Transparency is low, especially for large banks, but there have been positive developments in the disclosure of the final owners of the medium and large banks.

The share of foreign capital in the financial sector might increase after the new legislature has abolished limits on non-resident capital investments. The effectiveness of the banking system remains high. With an average ROA indicator (annual) of 2.4%, there is a reverse relationship between the size and effectiveness of the banks.

The high level of financial regulation is the result of thoughtful banking reforms and a limited number of financial institutions. However, the dominance of corporate interests and low cooperation between commercial banks and the regulator can slow down the development of the banking system.

The stability of the Kazakh banking system in the long term depends on the effectiveness of measures to align the growth of the financial sector and the economy in general. The health of the financial system in the medium term will be determined by measures taken by the regulator to manage the development of the banking sector.

KzRating is an independent rating agency, part of the Global Rating group, which also includes AmRating (Armenia) and RusRating (Russia). The agency focuses ON banks, bonds, leasing companies and research of the banking sector. To read more click here

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