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Sector NPLs (non-performing loans, loans 90 days overdue) remained flat over 2Q18 at around 13 percent of gross loans (adjusted for write-offs at Kazkommertsbank (KKB)), Fitch Ratings said.

However, asset quality remains weak, as banks' asset quality is undermined by accrued uncollected interest, high-risk FX and/or restructured exposures, sometimes with grace periods. IFRS 9 is likely to reveal higher impairment levels, although most banks do not make respective disclosures at interim dates.

Subsequently in July, Halyk Bank of Kazakhstan (Halyk, BB/Positive/bb) finalised its merger with KKB, which closed the final chapter of resolving the latter's problems. However, asset quality risks are manageable given Halyk's strong pre-impairment profitability, which is sufficient to absorb additional impairment, if any.

The NBK suspended the licenses of three small banks (Bank of Astana, Qazaq Banki and Eximbank) in 2Q18 and solvency/liquidity issues at these banks have not yet been resolved.

Bank failures and license suspensions show that regulatory forbearance on problem-loan recognition and provisioning has been diminishing. The small size of the failed banks limits contagion risks, but heightened regulatory pressure may speed up bank consolidation.

Bank's other metrics remained largely stable in 2Q18. Sector return on average equity was a high 22 percent in 1H18, while average capital and liquidity ratios remained reasonable. However, these ratios diverge widely between banks and there are still several banks in the sector with sluggish performance and weak capital/liquidity buffers.

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