Industry risks of Kazakh banks increase

Standard & Poor's Ratings Services took various rating actions on seven Kazakhstan-based financial institutions due to rising industry risk, the rating agency reported on Feb. 27.

S&P revised the outlooks to negative from stable on JSC SB Alfa-Bank, Kaspi Bank JSC, and PNB-Kazakhstan, and affirmed the long- and short-term counterparty credit ratings on these banks. The agency also revised the outlook to stable from positive on JSC Eurasian Bank and affirmed the long- and short-term counterparty credit ratings. Moreover S&P affirmed the long- and short-term counterparty credit ratings and maintained a stable outlook on ForteBank JSC (formerly known as Alliance Bank JSC), KazInvestBank, and Kazakh Agrarian Credit Corp. At the same time, the agency lowered the Kazakhstan national scale rating on JSC SB Alfa-Bank to 'kzBBB-' from 'kzBBB' and lowered the national scale rating on Kaspi Bank JSC to 'kzBBB+' from 'kzA-'.

“Today's rating actions follow our decision to downgrade Kazakhstan. In our opinion, industry risks for Kazakh banks have increased because of the slowdown of the Kazakh economy, on the back of the pronounced drop in international oil prices, and further devaluation of the Kazakhstani tenge. This reflects our opinion of the Kazakh banking system's weakening funding profile,” S&P said.

The sharp decline in oil prices greatly affects the outlook for Kazakhstan's economic growth and external and fiscal imbalances, given the Kazakh economy's high dependence on oil. The Kazakh oil sector accounts for an estimated 20-30 percent of GDP, more than 50 percent of revenue, and 60 percent of exports, according to S&P. The agency expects that the National Bank of Kazakhstan will either allow a gradual depreciation of the tenge or undertake another devaluation later this year, to accommodate lower oil prices and to ease the tenge's appreciation against the Russian ruble.

“Our assessment of the economic risk trend for Kazakh banks remains stable. The stable trend reflects the already very high economic risks in a global comparison and the banking sector's only modest exposure to the oil sector. We expect reduced demand for credit from small and midsize enterprises and consumers, which tend to be the banks' core lending customer base, in view of lower GDP growth,” the agency said.

S&P expects that credit risk in the economy will remain extremely high, taking into account Kazakh banks' history of aggressive underwriting standards and the country's weak payment culture and rule of law. The agency expects that the very high volume of nonperforming loans (NPLs) in the Kazakh banking system—24 percent as of year-end 2014--will continue to decline gradually in 2015, partly due to more proactive initiatives of the Kazakhstan National Bank.

The agency noted that in recent months, Kazakh banks have suffered from a lack of tenge liquidity due to the conversion of tenge deposits into foreign currency. To hedge the widening foreign currency asset and liability mismatches, Kazakh banks have had to use costly foreign currency swaps with the National Bank of Kazakhstan, which has negatively affected their cost of funds.

“We expect to see lower savings rates among corporate and retail depositors in 2015, in view of the reduced economic growth prospects and our expectation of the tenge's devaluation. We anticipate that increased retail deposit volatility and the dollarization of deposits will continue due to depositors' weakening confidence in the Kazakh economy and the tenge. Smaller banks will be particularly vulnerable to flight to quality and possible panic-driven deposit outflows. By our estimates, state-related companies are significant depositors with Kazakh commercial banks, accounting for over one-quarter of total deposits. We expect a squeeze on their deposit bases given the lower GDP growth,” S&P said.

The increased industry risk puts pressure on the anchor, the starting point in assigning an issuer credit rating to a bank, which is 'bb-' for banks operating predominantly in Kazakhstan? According to S&P.

“We have consequently revised our outlooks on Alfa-Bank, Kaspi Bank, PNB Kazakhstan, and Eurasian Bank, incorporating our opinion that these banks' capital buffers are likely to be affected by the increasing industry risks,” the agency said.

Meanwhile the stand-alone credit profiles for, and consequently the issuer credit ratings on, KazInvestBank, ForteBank, and Kazakh Agrarian Credit Corp are not immediately affected by the increasing industry risks.



/By Trend/