An asset quality review covering Kazakhstan's 14 largest banks is expected to reveal additional provisioning needs at some lenders, which could prompt the government and the central bank to launch corrective measures, according to S&P Global Ratings.
Most local lenders still do not hold sufficient provisions to fully cover their problem loans and are not able to cover their provisioning needs from earnings. The average coverage of bad loans at Kazakh banks stood at around 50% in the first half 2019, significantly below the coverage ratios in countries with comparable economic risk level, such as Russia or Turkey, S&P Global Ratings said in its Oct. 11 report.
To fully cover their nonperforming loans, Kazakh banks would need to resolve them or set aside around 1 trillion Kazakh tenge in additional provisions, a figure equivalent to 2% of the country's GDP or 2x the sector's 2018 net profit, the agency calculated.
There is no clarity over which corrective measures Kazakh authorities will take to prop up the banking sector after the asset quality review ends in December. Options include the launch of a new support program, similar to that initiated in 2017, and financial rehabilitation with the help of new owners, as implemented with Tsesnabank, currently operating as First Heartland Jýsan Bank.
S&P Global Ratings said that regardless of potential governmental support for the sector, Kazakh authorities will want local bank owners to become more involved in solving the problem of insufficient loan loss provisions by providing fresh capital, retaining earnings without dividend payouts or supporting their lenders in other forms.
The agency also warned that Kazakh banks will need to review their aggressive lending practices and improve corporate governance standards.
As of Oct. 10, US$1 was equivalent to 390.05 Kazakh tenge.