Moody's: Outlook stays negative for Kazakhstan's banking system

Unchanged since 2008, the banking system outlook is negative for Kazakhstan (Baa2 stable), says Moody's Investors Service. Over the 12-18 month outlook period, Moody's central scenario is for a 20% devaluation in the local currency (tenge) by the end of 2016, making debt servicing much harder for the 30% of the system's loan book that is foreign-currency denominated.

Further pressure on capital ratios from currency devaluation could arise as we expect banks' credit costs in 2015 slightly more than double from 1.5% of gross loans reported in 2014. Pre-provision profitability will be negatively affected by higher funding costs due to interest rate rise and the recent shift in favour of foreign-currency deposits.

"In the banks' operating environment, lower oil prices and the sharp economic downturn elsewhere in the CIS region will have a gradual effect on bank performance, with a forecast GDP growth rate of 1.5% in 2015, as lower state and corporate spending affects households' repayment capacity, constrain credit demand and hurt sectors such as trade, construction, and real estate," says Semyon Isakov, a Moody's Assistant Vice President - Analyst and author of the report.

"We also think it likely that the asset quality of currently performing loans will deteriorate, although overall NPL ratios will likely to trend downwards following a recent change in domestic tax law that encourages banks to write off legacy NPLs. With regards to the formation of new NPLs, decreased availability of consumer credit following a period of rapid growth that outpaced incomes will mean that the retail segment will be particularly pressured. Currency devaluation will improve competitiveness of borrowers in relation to imports, but overall it will certainly become harder to service foreign-currency loans, which are mostly unhedged," adds Mr. Isakov.

Moody's says that banks' funding options will be challenged by the increased dollarisation of the banking system, as the proportion of customer deposits that are denominated in foreign currency (mostly dollars) has grown to 55% from 37% since the beginning of last year.

As such, the banking system currently lacks local-currency funding after the conversion of a large amount of tenge deposits.

At the same time, higher funding costs will mean that bank profitability could come under pressure, and at the very least break-even, assuming a tenge devaluation in line with Moody's central scenario of 20% by the end of 2016.