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Modest economic growth, sluggish credit demand and high asset-quality risks have continued to hinder new bank lending in Kazakhstan, Fitch Ratings International Ration Agency said in its Kazakh Banks Datawatch for 2Q16.

According to Fitch, despite continued growth in the tenge proportion of customer deposits, to 42% at end-2Q16 from 37% at end-1Q16, sector gross loans contracted, adjusted for exchange rate changes, by 1.4%. Non-retail loans fell by a sharp 2.7% and retail loans edged up 0.5%.

Non-performing loans (NPLs) edged lower to 10.2% (including overdue accrued interest) of total loans at end-2Q16 from 10.7% at end-1Q16, although the ratio does not capture a large amount of restructured or distressed loans at many banks which are classified as performing. The asset quality review previously announced by the National Bank of Kazakhstan is unlikely to start before 2017, Fitch believes.

Pre-impairment profit (net of one-offs) fell to an annualised 4.8% of average loans in 2Q16 from 5.3% in 1Q16 on weaker foreign-currency results. However, lower provisioning charges, at 1.9% of average loans in 2Q16, helped to boost return on average equity (ROAE) to 18% from 15%. Impairment recoveries supported Kazkommertsbank's ROAE at 25% even though pre-impairment profit fell sharply to 1.8% from 7.5% of average loans.

Earnings retention and loan contraction supported sector Tier I and total regulatory capital ratios, which grew 0.3pp to 13.4% and 16%, respectively, at end-2Q16.

Liquid assets continued to build up and covered more than a third of total sector liabilities. Halyk Bank's liquid assets exceeded a high 55% of liabilities. However, liquidity shrank at Kazkommertsbank to 13% of liabilities at end-2Q16.

Fitch Ratings’ Kazakh Banks Datawatch for 2Q16 consists of key data from banks' regulatory financial statements and disclosures sourced primarily from the National Bank of Kazakhstan and Kazakhstan Stock Exchange. The 2Q16 report covers 28 of the sector's 34 banks, comprising 99% of system assets.

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