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Kazakh Banking Outlook 2021: A Windy Road To Recovery


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Kazakh Banking Outlook 2021: A Windy Road To Recovery

S&P Global Ratings expects the Kazakh banking sector to switch to growth mode in 2021. That's on the back of GDP growth of 3.2% in 2021, according to our forecasts, after a contraction of 2.6% in 2020. For years, the loan portfolio of the Kazakh banking sector has been shrinking, and now constitutes only 23% of GDP compared to 55% in 2008. We believe that after the series of massive cleanups performed over the past several years, Kazakh banks will likely be in a position to focus on growing new business in 2021. That said, the quality of this growth will depend significantly on underwriting standards because aggressive lending practices may require another cleanup of the riskiest players in the years to come, in our view.

A Switch To Growth In 2021

We expect that Kazakh banks' loan portfolio will start growing in 2021 after stagnating over the past five years (see chart 1). Since the end of 2015, there have been a number of sizable measures to clean up the banking sector (including provisioning requirements and asset purchases). The corporate loan portfolio contracted 30% over the last five years. This was partly compensated by growth of the retail loan portfolio that expanded 84% over the same period.

Chart 1


We forecast 8%-10% nominal growth for the Kazakh banking sector's loan portfolio, corresponding to real growth of about 1.5%-3.5% in 2021. In our view, this will be supported by the following factors:

Economic recovery.   We expect a mild economic recovery in 2021, after a 2.6% contraction in GDP in 2020, as oil volumes and prices increased and non-oil growth recovered, supported by easing domestic restrictions on economic activity and economic recovery in major trading partners (see "Kazakhstan 'BBB-/A-3' Ratings Affirmed; Outlook Stable," published on March 5, 2021). In addition, we expect the government will continue providing stimulus measures, in particular, through capital investment programs, such as Nurly Zhol and Nurly Zher, both of which have been extended to 2025. We expect the economic recovery will lead to higher demand for loans from both corporate and retail borrowers.

Pension reform.   The Kazakhstan government launched a pension reform effective Jan. 1, 2021. It allows pension scheme participants to partly withdraw their pension savings and use them for new mortgages, purchases of real estate, new home construction, as well as transfers to non-state asset managers or payments of medical expenses. We believe this will support mortgage portfolio growth in 2021, especially given the existing attractive mortgage programs in Kazakhstan subsidized by the government. According to United Pension Fund estimates, excess pension savings amounted to about Kazakhstani tenge (KZT) 2.5 trillion as of end-2020 (which corresponds to around 10% of banking sector's total assets). While applicants have expressed more interest in using pension savings for buying new homes without attracting debt so far (about 47% of overall volume of applications), a significant number of applicants were also interested in receiving mortgage loans (about 10% of overall volume of applications).

Government support programs.   We expect that government programs will continue supporting banking sector growth--both in corporate and retail segments. We estimate that about 15% of all new loans in Kazakhstan were disbursed under government support programs in 2020.

We expect that the government programs 7-20-25, Nurli Zher (for primary real estate market), Baspana Hit (for both primary and secondary markets), and Otbasy bank programs for socially vulnerable groups will support banking sector mortgage portfolio growth in 2021. These programs allow borrowers to apply for mortgage loans at below-market interest rates (7% for 7-20-25, 5% for Nurli Zher, and the key rate plus 1.75% for Baspana Hit; with the key rate being 9.0%, and average market rate on long-term loans at 10.5%, according to NBK).

We also believe that corporate loan portfolio growth will be supported by several government programs such as Economy of simple things, Business Road Map – 2025, Enbek, Employment road map, as well as NBK's subsidized lending programs for working-capital purposes. The government allocated KZT703 billion for these programs in 2021.

Cleanup of the banking sector over the past several years.  We consider that as a result of the significant cleanup measures over the past five years, the largest legacy problem assets are now outside the scope of the Kazakh banking sector. Therefore, we do not expect any other large sales of problematic assets to nonbank organizations (such as those related to the resolutions of Kazkommertsbank and Tsesnabank in 2016-2019). We consider that the Kazakh banking sector will take a breath and be able to concentrate on developing new business in 2021.

Seemingly stable asset quality will continue to balance two opposing trends, while credit costs will stay elevated

We expect the level of problem assets classified as Stage 3 and purchased or other credit-impaired (POCI) under IFRS 9 will remain largely stable in 2021 (see chart 2). On the one hand, we expect a prolonged impact from COVID-19 restrictions in Kazakhstan on the banking sector's asset quality, as in the rest of the world (see "Lower And Later: The Shifting Horizon For Bank Credit Losses," Feb. 2, 2021). On the other hand, we take into account the continuous efforts of Kazakh banks and the regulator to clean up banks' balance sheets from legacy problem assets, as well as relatively weak lending activities in the sector in pre-COVID-19 year.

Chart 2


We estimate the share of problem loans in the Kazakh banking sector (classified as Stage 3 under IFRS 9) at about 20%-22% of total loans at the end of 2020. We note that our estimate of Kazakh banks' problem assets classified as Stage 3 and POCI under IFRS continues to be significantly higher than NBK's measure of the sector's problem loans (those overdue more than 90 days) that equaled just 6.82% of total loans as of end-2020. We also note that in the past the Kazakh financial regulator tolerated underreporting of problematic assets by banks. As a result, there has been a number of cases of banks reporting low-single-digit nonperforming loans under national standards that subsequently became insolvent (for example, Deltabank in 2016) or required massive support packages (for example, Tsesnabank in 2018).

Trends putting downward pressure on asset quality

Kazakh banks introduced a series of payment moratoriums for different groups of borrowers in 2020 as part of the country's responses to the effects of the pandemic. Three-month payment moratoriums for retail borrowers and small and midsize enterprises (SMEs) were mandated by authorities that ended on Oct. 1, 2020. Payment deferrals for corporate borrowers were granted by banks on a case-by-case basis. These measures were aimed at preventing borrowers facing short-term liquidity shortfalls from becoming insolvent and defaulting on repayments. According to estimates by The Agency of the Republic of Kazakhstan for Regulation and Development of Financial Market (the Agency), the number of borrowers that requested payment deferrals accounted for about 40% of all borrowers in the SME segment and about 34% in the retail segment.

Payment moratoriums did not necessarily indicate a decline in asset quality, in our view. We observed similar measures in many countries last year. According to the information provided by local banks and the Agency, most borrowers that requested payment deferrals returned to normal payment schedules once the forbearance period ended. That said, we estimate that about 5% of borrowers asked to extend original payment holidays or experienced difficulties with servicing their obligations, because of new lockdowns introduced last autumn and a longer path to recovery than initially anticipated. The pandemic has increased the poverty rate in Kazakhstan up to 12%-14% as of end-2020 from about 6% in 2016, according to World Bank estimates. A number of sectors, such as transportation, trade, and hospitality have taken a big hit from the pandemic. This will likely increase income inequality and weaken the debt service capacity of some borrowers.

In addition, we see risks that the recently launched pension reform and ongoing government programs to support real estate may overheat the sector, resulting in the accumulation of credit risks by banks in the longer term. The dynamics of the mortgage portfolio of Kazakh banks appears balanced so far. We estimate that about 22.5% of the size of applications to withdraw excess pension savings since the launch of the reform were aimed at paying off existing mortgages. That said, we consider that volatile real estate prices might lead to future credit risks for banks in case of a rapid decrease of real estate prices and collateral values under banks' loans, once the demand for real estate is no longer supported in the amount it is supported now.

Trends that are improving asset quality

We note that banks continued their efforts to clean up their portfolios of legacy problem assets despite 2020's challenging economic environment. This somewhat offsets the negative impact of the pandemic on Kazakh banks. The Agency required four banks (ATFBank, Bank CenterCredit, Eurasian Bank, and Nurbank) to create significant, additional loan loss provisions following the results of a systemwide asset quality review completed in February 2020. We understand that these banks are currently on track with their five-year plans for working out problem assets and some banks are even outperforming the plans.

We take positive note of regulatory measures introduced to contain risks in the unsecured consumer lending segment at the beginning of last year. In particular, the regulator increased risk weights of unsecured consumer loans extended to riskier borrowers in the calculation of the regulatory capital adequacy ratio, making it more expensive for banks to extend such loans. As a result, the share of unsecured consumer loans decreased to about 64% of total retail loans extended in 2020 from around 71% a year earlier, according to First Collection Bureau (see chart 3). We expect the share of unsecured consumer loans will likely decrease further in 2021, taking into account the growing volume of mortgage loans.

Chart 3


In 2021, we expect Kazakh banks' credit costs will likely stay elevated compared with peer countries' (see chart 4), at about 3.5% of the banking sector's total loans. That's due to the prolonged recognition of problem assets related to COVID-19 as described above (that may flow into 2022) and the continuous provisioning of legacy problem assets in line with last year's plan after the asset quality review.

Chart 4


Profits Are Set To Be Stable But Skewed Toward Several Banks

Contrary to our expectations, Kazakh banking sector's profits were relatively resilient in 2020. Results were stronger than we had expected, with net income in local currency declining by only 10%, according to our preliminary estimates, compared with our previous expectation of a 50% decline. However, credit costs were also lower than we estimated, therefore the resilience of profitability may be partly related to the delayed recognition of loan losses. We now believe that Kazakh banks, similarly to banks in other emerging economies, will recognize loan book problems over a longer period of time than we initially expected, with the higher provisioning trend to continue in 2021 and, likely, in 2022.

At the same time, it's important to outline that profit distribution in the sector remains uneven, and this disparity has grown in 2020. While in 2019 the two largest profit contributors, Halyk Bank and Kaspi Bank, earned around 61% of all banking sector profits, the proportion of these two banks in system's total profits increased up to 75% in 2020.

Chart 5


We believe this unevenness will remain in the next 12-18 months, with stronger banks gaining more earnings generation capacity and resilience and weaker players gradually leaving the market or merging with larger institutions. In our opinion, this is because larger banks are less prone to the loss of customer confidence and may enjoy the economy of scale.

However, we note that interest margins in the sector remain relatively high, which should support banking sector profitability and partly offset relatively high cost of risk. The Kazakh banking sector also compares well with other economies in terms of efficiency, with a median cost-to-income ratio of about 45%-47% in 2021, compared with 52% in the Commonwealth of Independent States (CIS), Ukraine, and Georgia, and a high 62% for European banks. At the same time, the variance in both profitability and efficiency from bank to bank will remain a distinctive characteristic of the sector.

Chart 6


Chart 7A


Chart 7B


Governance and transparency weaknesses will likely continue constraining the effectiveness of regulation

We consider that governance and transparency in Kazakhstan's banking industry remains weak, despite some improvements in recent years.

In particular, we acknowledge that banking regulators have taken a number of steps to improve banking supervision, including conducting a systemwide asset quality review last year and enhancing risk-based supervision. However, we note that the regulator tends to deal with problems reactively and on case-by-case basis, rather than sticking to a rules-based regulatory framework, and has tolerated limited transparency in certain cases. We note that only minimal information was publicly disclosed about the deal between the two large Kazakh banks--First Heartland Jysan Bank and ATFBank--that was completed at the end of 2020. The structure of beneficiary ownership and sister organizations of some banks remain vague, making it difficult to control related-party lending, which has caused severe problems for a number of Kazakh banks in recent years. Overall, we consider that measures to sustainably reduce record-high problem loans by the Kazakh banking sector have not been effective so far.

In addition, we consider that Kazakhstan's banking regulator lacks independence and can be subject to political interference from the government, government-related entities, and individuals with well-established political connections. The fact that the regulator has been recently tolerating the breach of minimum regulatory requirements to capital and liquidity by some banks for a while (eight to 24 months) demonstrates these deficiencies.

The Creditworthiness Of Kazakh Banks Remains Low In A Global Context; Outlooks Are Likely To Diverge

The median rating level of banks in Kazakhstan is currently 'B', which is low both in an international context and compared with neighboring countries'. Most of the outlooks on Kazakh banks are stable, but we may see greater outlook divergence in the next 12-18 months. There are several factors that could justify positive rating movements, namely a broad economic recovery in Kazakhstan, an individual bank's ability to navigate successfully through the COVID-19 crisis, earnings resilience, and sustained progress in working out nonperforming loans. Asset quality metrics will be central to banks' capital resilience and future profitability.

On the contrary, we may downgrade those banks that show weaker financial results, become subject to customer deposit outflows, or face high provisioning needs over a prolonged period of time. Most banks in Kazakhstan have sustained their levels of capitalization and liquidity, but the situation may change rapidly, depending on each bank's development path.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: As the situation evolves, we will update our assumptions and estimates accordingly.

Chart 8


This report does not constitute a rating action.

Primary Credit Analysts:Irina Velieva, Moscow + 7 49 5783 4071;
Ekaterina Marushkevich, CFA, Moscow + 7 49 5783 4135;

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