Kazakh banks are facing another challenging year amid moderate GDP growth, local currency exchange-rate volatility, and low commodity prices. This is according to a report titled "Kazakhstan's Struggling Banking Sector Is Still Waiting For A Thorough Balance-Sheet Clean-Up", published by S&P Global Ratings.
According to S&P, extremely high credit risk also remains a key weakness. The rating agency believes that official nonperforming loan (NPL) figures do not paint a true picture; S&P thinks NPLs (including restructuring loans) could reach 25-30 percent of the system total.
“This reflects still-high legacy problem loans at the system level and potential asset quality deterioration following some market players' recent aggressive expansion and underwriting policies,” the report said.
S&P believes that the banking sector will not stabilize unless banks undergo a thorough balance-sheet clean-up. The authorities are currently discussing a 2 trillion tenge injection into the banking sector, which will aim to reduce problem loans but likely only at the larger, more systemically important, banks.
“The National Bank of Kazakhstan's upcoming stress test and asset quality review could reveal hidden problem loans at some banks and highlight additional provisioning and capital needs,” S&P said.
However, generating sufficient risk-adjusted returns over a cycle will remain difficult for most banks, and their creditworthiness and stability will continue to depend on their owners' ability and willingness to fund growth with capital injections, according to the report.