S&P assesses trend for Kazakhstan's economic risk as stable
The trend for Kazakhstan's economic risk is stable, despite the
negative outlook on the long-term sovereign rating, Standard &
Poor's Ratings Services said in its new report "Banking Industry
Country Risk Assessment: Kazakhstan" published on July 24.
S&P classifies the banking sector of Kazakhstan in group '8'
under the Banking Industry Country Risk Assessment (BICRA)
methodology. Other banking systems in group '8' are those of
Azerbaijan, Tunisia, Argentina, Hungary, and Nigeria. In addition,
the agency includes Russia, which is in group '7', as a peer for
the Kazakh banking system.
The bank criteria use the BICRA economic risk and industry risk
scores to determine a bank's anchor, the starting point in
assigning an issuer credit rating. The anchor for banks operating
only in Kazakhstan is 'bb-'.
Major strengths factor for Kazakhstan's banking sector are good
economic growth prospects compared with developed countries, strong
Kazakhstan's fiscal and external balance positions and diversified
funding base with a sizable share of retail deposits and limited
reliance on external funding.
Weaknesses factors are aggressive lending, weak underwriting
standards, and rising credit losses over the past three years;
inability of regulators and banks to clean up very high levels of
problem loans after the crisis; low risk-adjusted returns of the
banking system; weak governance and transparency, and a high
incidence of corruption and fraud in the banking sector.
"Economic risks in Kazakhstan remain very high in a global context.
Kazakhstan's economy depends heavily on the hydrocarbons sector,"
the agency said.
Although S&P expects GDP growth to slow to 4.5-5 percent in
2014-2016, it expects banking assets to grow much faster at about
15 percent in 2014-2015, similar to the rate in 2011-2013.
In the agency's opinion, the Kazakh economy has been in a
"correction" phase since 2011, during which banks' nonperforming
and restructured loans have remained the highest among peers and
have not declined, while credit losses have increased. The view of
extremely high credit risk in Kazakhstan takes into account the
country's banks' history of aggressive underwriting standards and
the country's weak payment culture and rule of law.
Industry risks are also very high in Kazakhstan, according to
S&P. The agency believes the Kazakh banking regulators lack
independence and can be subject to political interference. Their
corrective actions to prevent the system from overheating before
the recent crisis and to clean up the banking system's very high
level of problem loans afterward proved ineffective. In S&P's
view, Kazakh banks' risk appetites remain aggressive, reflecting
opportunistic growth by some small and midsize Kazakh banks as well
as banks' continued financing of volatile real estate and
construction projects. The banking system's risk-adjusted
profitability is low because income generation significantly lags
balance sheet expansion at rapidly growing banks, due to margin
pressure, or due to poor asset quality at a few large and midsize
banks. Compared with before the crisis, Kazakh banks now
predominantly finance themselves with customer deposits, a large
part of which is from the government and government-related
companies.
The expectation of a slowdown in GDP growth is largely due to lower
oil production and increased regional tensions. However, the
banking sector has only modest risk exposure to the oil sector.
S&P still expects growing demand for credit from small and
midsize enterprises (SMEs) and consumers, which tend to be the
banks' core lending customer base. Nevertheless, the agency expects
credit risk in the economy to remain extremely high.
S&P expects that the very high volume of nonperforming loans
(NPLs) will decline only gradually in 2014 and 2015, partly through
write-offs stimulated by newly enacted tax incentives. In addition,
the agency expects that the unwinding of large imbalances, caused
by the credit and real estate boom, will likely continue to
constrain the banking sector's development. Nevertheless, S&P
believes most problem loans related to the 2008 crisis have already
surfaced, and that credit losses, while remaining elevated in a
global context, are unlikely to increase further.
"We view the trend for Kazakhstan's industry risk as stable. Margin
pressure and undiversified revenues typically do not allow banks to
generate sufficient earnings to buffer a rise in credit costs,
which could happen in a down cycle," S&P said.
The agency notes that some consolidation in the banking sector is
underway, with three mergers pending, and the regulator's
imposition of increased minimum capital requirements will make it
harder for small banks to operate in future. If consolidation
negatively affects the view of industry stability, S&P will
likely revise downward the assessment of industry risk.
"As opposed to precrisis financing by Kazakh banks, we expect
continued growth in corporate and retail deposits to fund lending
growth, with very limited recourse to wholesale funding in
international capital markets," S&P said.