The economic risks have increased in Kazakhstan, said the new report of the Standard & Poor's Ratings Services.
S&P classifies the banking sector of (BBB/Negative/A-2) in group '8' under its Banking Industry Country Risk Assessment (BICRA) methodology.
The strengths defining the risks of the banking sector of Kazakhstan are strong fiscal and external balance positions and limited market distortions due to a low level of government intervention or competition, according to the S&P.
The weaknesses are the tight Kazakhstani tenge liquidity in the banking system owing to high deposit dollarization and the impact of devaluation; aggressive lending, weak underwriting standards, and rising credit losses over the past four years; low risk-adjusted returns of the banking system, with narrowing margins and elevated costs and very weak payment culture and rule of law.
Other countries in group '8' are Russia, Azerbaijan, Hungary, Uzbekistan, Georgia, Bolivia, Croatia, Paraguay, Sri Lanka, and Lebanon. S&P also compares Kazakhstan with some countries in group '9', such as Vietnam, Nigeria, and Tunisia.
“In our view, economic risks have increased in Kazakhstan, reflecting markedly falling wealth levels as measured by GDP per capita in US dollars,” said the message from S&P.
“This was due to a slowdown in estimated macroeconomic growth to 1.5 percent in 2015 and 2 percent in 2016, given the economy's heavy dependence on hydrocarbons and a sharply depreciated tenge,” said the message.
Banking industry risks remain elevated in Kazakhstan due to concerns regarding the banking system's weakened funding profile, according to the rating agency.
S&P anticipates that pressure on tenge funding and high asset-liability mismatch in foreign currencies will persist over the next 18 months.
“We believe Kazakhstan's banking regulators lack independence and can be subject to political interference,” said the message. “The system's low risk-adjusted profitability is likely to decrease further in the next two years, hit by narrowing margins and rising credit and funding costs.”
S&P has revised its view of the economic risk trend in Kazakhstan to negative from stable.
“This revision reflects our opinion that slowing macroeconomic growth in Kazakhstan and tenge depreciation following the government's move to a flexible exchange rate in August 2015 have materially reduced the wealth of Kazakhstan's population, weakening Kazakh banks' business generation and profitability,” said the rating agency.
S&P views the trend for industry risk as negative. The rating agency believes that industry risks for Kazakh banks have increased because of the slowdown of the Kazakh economy, the pronounced drop in international oil prices, and sharp devaluation of the Kazakhstani tenge.
“We believe the funding profile of the Kazakh banking system is weakening. Widening foreign currency assets and liability mismatches have led banks to use foreign currency swaps with the National Bank of Kazakhstan (NBK) and on the interbank market, which negatively affected their cost of funds,” said the message.
There are essentially no other instruments available for banks on the market to manage their currency risks in the long term, according to S&P.
S&P classifies the Kazakh government as supportive toward the domestic banking system.
This classification recognizes the government's track record of providing support to the banking system during the 2008-2009 crisis, tenge liquidity support through foreign currency swaps, through the Problem Loans Fund and Single Accumulative Pension Fund in 2014-2015, according to the rating agency.
S&P believes Kazakhstan's government has the capacity and willingness to support domestic banks with high and moderate systemic importance.
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