Baku, Azerbaijan, Apr. 24
By Fakhri Vakilov – Trend:
Weak asset quality of Kazakh banks is the main cause of their recent bankruptcies, Trend reports with reference to Fitch Ratings.
As Fitch noted at its 13th annual conference on Kazakhstan in Almaty today, Kazakh banks' weak asset quality is still the most important factor for their Viability Ratings as the clean-up of the sector continues.
Their analysis of Fitch-rated Kazakh banks, representing 60 percent of sector assets, highlights the extent of the problem. Average IFRS 9 Stage 3 and Stage 2 loans were 20 percent and 9 percent of gross loans, respectively, at the end of 2018.
Banks may eventually need to establish additional provisions for these exposures. However, some banks have limited capacity to do so as their capital buffers are thin in the context of such high problem loans and their pre-impairment profitability is undermined by uncollected accrued interest payments.
The situation could be significantly worse for banks with the highest proportions of legacy problem assets, as the scale of the recent transfer of problem loans from the country's second-largest bank, Tsesnabank, suggests.
About 85 percent of Tsesnabank's loans were transferred to the state or deeply provisioned, implying very weak loan quality.
Asset quality aside, the sector's overall credit metrics have been relatively stable in recent years, with reasonable average profitability, capitalization and liquidity ratios.
However, there is significant divergence between banks. The sector is uneven with one half (by sector loans) represented by stronger institutions and foreign-owned banks, which could receive capital support from their parent banks, if needed.
The other half comprises banks that are smaller and/or weaker, including several with high amounts of legacy problem loans. These banks are likely to be the main focus for further sector clean-up or consolidation in the next few years.
Several small banks (with market shares of 2 percent or less) failed and were liquidated in recent years, while larger problem banks received some state support.
There is no formal bail-in or bank resolution legislation in Kazakhstan. In most cases, decisions on whether to support or liquidate banks seem to have been based on the systemic importance of each bank and the scale of the asset-quality problem.
In two instances, state support to private banks was combined with bail-in of senior unsecured state-owned creditors. The authorities view the bail-in of state-owned creditors as a form of state support, but Fitch counts it as a default.
State support to banks was considerable in 2017-1Q19 at more than 5.3 trillion tenge ($13.9 billion; 8.8 percent of 2018 GDP). However, the small size of the banking sector could limit the likely cost of further support. Total sector loans at end-2018 were equivalent to 23.5 percent of GDP.
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