Link to Fitch Ratings' Report: Kazakh Banks Datawatch 4Q16
Fitch Ratings-Moscow/London-16 February 2017: Announcements and actions by the Kazakh authorities signal a step-up in the resolution of problems in the local banking sector, Fitch Ratings says. We believe asset quality could improve significantly as a result of the state's plan, announced in February, to provide KZT2trn through the problem loan fund for purchases of distressed loans from troubled banks.
However, considerable uncertainty remains as to the pricing and mechanisms for loan sales to the fund and the banks and assets that would be eligible. Accordingly, we believe that risks for creditors of the sector's weaker banks remain considerable, as they may be forced to share losses before or as any support kicks in.
Senior officials in Kazakhstan have indicated an intensified focus on rehabilitation for the banking sector. They have voiced increasing concerns over its health, with asset quality proving to be weaker than reported. While underreporting of problems by local banks is well known, the government's official acknowledgment of the problem is significant.
We estimate that non-performing loans across the sector were about KZT0.6trn at end-1H16. However, significant asset risks, estimated at KZT3.4trn, also stem from restructured and other distressed exposures, the latter mainly relating to Kazkommertsbank (KKB). Non-impaired foreign-currency loan portfolios of about KZT3trn may also need cleaning, despite being classified as performing.
The authorities also appear to view bank mergers as an important part of sector rehabilitation, although we believe mergers will only lead to sustainable improvements in solvency if weak banks are sufficiently cleaned up by the state or recapitalised by shareholders before being merged.
The authorities appear more confident about closing small weak banks, mirroring a similar regulatory push in Russia. The National Bank of Kazakhstan imposed restrictions on several small banks in November 2016, triggering significant deposit outflows. As a result, one small bank, Kazinvestbank, failed and was liquidated.
The two largest Kazakh banks, Halyk Bank of Kazakhstan (HB) and KKB, each accounting for about 20% of sector assets, are discussing a potential deal. We believe that an acquisition of KKB by HB is possible but the cleaning-up of KKB from distressed assets is a pre-requisite for HB. Should KKB's rehabilitation measures prior to a hypothetical purchase by HB prove insufficient, HB's Long-Term Issuer Default Rating of 'BB' could be downgraded.
The third-largest Kazakh bank, Tsesnabank, plans to buy a 41.9% stake in Bank Centercredit, potentially creating a bank with a market share of 14%. The acquisition costs would probably be small but may increase as a result of the mandatory offer to minority shareholders before a subsequent legal merger. However, the risks for the banks' 'B' ratings are limited, given their already low level.
The report "Kazakh Banks Datawatch 4Q16" is available at www.fitchratings.com or by clicking on the link above.
Source: Fitch Ratings