April 26, 2017 / 11:32 AM / 4 months ago

Fitch: Kazakhstan Starts to Get to Grips With Troubled Banks

(The following statement was released by the rating agency) MOSCOW/LONDON, April 26 (Fitch) The health of the troubled Kazakh banking sector should start to improve as the authorities push ahead with initiatives to address weak asset quality while the economy recovers following a modest increase in oil prices, Fitch Ratings said at its 11th annual conference on Kazakhstan in Almaty yesterday. However, rehabilitation efforts may hurt bank creditors before or as any state support kicks in. Speaking at yesterday's conference, Oleg Smolyakov, a deputy governor of the National Bank of Kazakhstan (NBK) confirmed the NBK's commitment to conduct an asset-quality review, together with stress tests, to clarify banks' true exposures to distressed assets. Non-performing loans (NPLs) are often underreported in Kazakhstan and the International Monetary Fund recently highlighted the importance of getting a clear picture on banks' asset quality and capital adequacy, adding that recognition of loan losses and capital injections by shareholders will be key to strengthening the sector. The asset-quality review is scheduled to start later this year as part of what is to become a new supervisory approach. It may conclude that some banks must strengthen their capital by raising equity, which will also make them eligible for accessing a Tier 2 capital support programme being considered by the NBK. Mr Smolyakov said yesterday that the NBK intends to provide interim liquidity support and regulatory forbearance to facilitate individual bank rehabilitation, when feasible. NPLs reduced slightly in 2016 to 7% of sector loans (end-2015: 8%), but we still view asset quality as a serious weakness for the sector as NPL ratios significantly understate the extent of problem loans at some banks. Significant asset risks also stem from loans not classified as NPLs, such as restructured and other distressed exposures. Foreign-currency loans with grace periods for payments are also a source of high asset-quality risks as a result of the 2015 tenge devaluation. We estimate that unreserved restructured and other distressed exposures across the sector were about KZT3 trillion at end-2016 compared with net NPLs of about KZT0.5 trillion. The problem exposures of the largest lender, Kazkommertsbank, were particularly significant, at about 60% of loans. Sector foreign-currency loans, classified as non-impaired, were about KZT3 trillion, with about a third of this at Tsesnabank, and a significant portion of these may need additional provisioning. We believe asset quality could improve significantly as a result of the state's plan, announced in February, to provide KZT2 trillion through the problem loan fund for purchases of distressed loans from troubled banks, mainly Kazkommertsbank. However, the risks for bank creditors in Kazakhstan remain considerable, as they may be forced to share losses to beef up troubled banks' capital bases. The authorities appear to view bank mergers as an important part of the sector's 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 also appear more confident about closing small weak banks if they fail to raise sufficient equity capital, mirroring a similar regulatory push in Russia. Contact: Roman Kornev Director Financial Institutions +7 495 956 7016 Fitch Ratings CIS Limited 26 Valovaya Street Moscow 115054 James Watson Managing Director Financial Institutions +7 495 956 6657 David Prowse Senior Analyst Fitch Wire +44 20 3530 1250 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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