Azernews.Az

The clean-up of bad debt at Kazakhstan's banks is still uncertain despite the central bank's latest plans to tackle the high levels of non-performing loans, the international rating agency Fitch Ratings reported on June 4.

"Nevertheless, real asset quality improvement could be moderately positive for banks' ratings, if they do not incur large additional losses in transferring the loans to the central bank's problem loan fund or writing them off," the agency said.

The extent to which the problem loan fund can provide relief for banks is unclear, despite the proposed recapitalisation to 250 billion tenge ($1.4 billion) from 5 billion and changes in investment policy to allow it to buy construction-related debt - the bulk of the sector's non-performing loans, according to Fitch. The planned changes could give the fund, which has struggled to gain traction since being established in early 2012 because of the lack of funding and restrictive investment policy, greater capacity to buy up banks' bad debt portfolios.
But even with the significant increase in size, the problem loan fund is still small compared with banks' non-performing loans. Around one-third of Kazakh bank loan books were non-performing at the end of the first quarter 2014, according to the central bank.

Although reserves on non-performing loans are already substantial, Fitch estimates that the five most affected banks would need to transfer 841 billion of net non-performing loans non-performing loans to achieve the 10 percent non-performing loan target planned by the central bank for end-2015.

"This is over three times the planned size of the problem loan fund, so the fund can only partly alleviate banks' asset quality problems," the rating agency said.

It is unclear whether the government would increase problem loan fund size later on with further capital injections, or allow it to issue public debt, potentially with a state guarantee.
The estimate excludes 466 billion tenge of gross non-performing loans (reserve amounts are not available) of Alliance Bank ('Restricted Default') and Temirbank (unrated) because these banks may significantly increase provisioning levels as a result of Alliance's ongoing debt restructuring and potential future merger of the two banks. Other Kazakh banks with non-performing loan ratios above 10 percent are either small or hold mostly non-performing consumer finance portfolios that might not be eligible for purchases by the problem loan fund.

The benefit to banks off-loading loans to the problem loan fund will depend on the transfer mechanism, particularly pricing, according to Fitch. Large Kazakh banks' ability to absorb further loan loss provisions and write-downs is limited relative to the high share of restructured loans that may require additional reserves. Their profit generation and capital ratios may be weakened if material losses arise when non-performing loans are transferred. The due diligence process could be lengthy and delay any swift transfer of bad debt.

The impact of the latest regulatory non-performing loan cap on Kazakh banks' credit profiles will depend on the extent to which banks genuinely reduce asset quality risk. The measure is applied to the unconsolidated balance sheet, which means that banks could transfer non-performing loans to subsidiary special-purpose vehicles to meet the 10 percent target.
"We would view this as cosmetic since banks would still retain the risk. Banks may also lower reported non-performing loans by writing off loans, but this is likely to crystallise losses and undermine already weak capital ratios," the agency said.