OREANDA-NEWS. Kazakh banks are facing greater pressure from increasingly weak asset quality as a result of economic recession and sharp tenge devaluation, says Fitch Ratings.

We consider efforts to clean up loan books since mid-2015 largely cosmetic, and many borrowers are likely to struggle to service foreign-currency (FC) loans, which make up a sizeable part of most banks' lending. Non-performing loans (NPL) reported by Fitch-rated banks ranged from 5% of gross loans to 19% at end-2015. But including restructured loans, total problem loans would be between 10% and 48%. The figure reaches a high 65% for Kazkommertsbank, which includes exposure to BTA. We expect further loan restructuring in 2016 as FC portfolios deteriorate further.

Most lenders are likely to continue to recognise loan impairment losses gradually because capital buffers are modest and core profitability is weak, which makes it difficult for banks to build up capital through retained earnings. Reported regulatory capital ratios are fairly high, with a sector Tier 1 ratio of 12.7% at end-2015. But the ratios are held up by limited new lending and lenient NPL reserve ratios.

Capital buffers at most large banks are modest compared with unreserved problem loans. Halyk, which maintains strong loan loss cover, is an exception. Capital ratios are likely to continue to be supported because banks are allowed to classify their loans in a flexible manner. But the results of the regulatory system-wide stress-testing exercise, to be completed in August 2016, may result in some regulatory actions on troubled institutions.

Balance-sheet FC mismatches are mostly hedged with swaps provided by the National Bank of Kazakhstan (NBK), and we expect these to continue to be rolled over as required. FC liquidity is comfortable, based on most banks' large US dollar liquidity cushions, largely comprising cash placed with the NBK. Converting these to tenge to bolster loan growth would be difficult because the banks have to maintain FC assets to balance their open currency positions, while additional funding from quasi-state entities (about 30% of system liabilities at end-2015) will be limited in 2016.