Banking sector

S&P Global Ratings analysts have released a new report "Banking Industry Country Risk Assessment: Republic of Kazakhstan". Banking sector of Kazakhstan (BBB-/Stable/A-3) was assigned to group 9 by the level of industry and country risks (Banking Industry Country Risk Assessment — BICRA).

According to published information, small and medium-sized banks have to be ready for mergers and acquisitions of assets, and, possibly, to leave the market in the next two years. Competition will increase in the sector with large players dominating small and medium-size.organizations.

S&P analysts also noted that medium - sized domestic banks have relatively small capital stock. The exception was "Nurbank" which received capital infusion from a shareholder and large subordinated loan from the regulatory body on favorable terms that allowed it to form capital stock.

Banks that fail to generate significant reserves will operate at high losses in the face of growing non-performing loans.

The share of "bad" loans for which borrowers do not fulfill their obligations (Stage 3 under IFRS 9) in the Kazakhstan banking sector may grow to 23-25% over the next year and a half against 20% in mid-2020.

"We believe that the volume of provisions under IFRS for Kazakhstan banks (12.8% of the total loan portfolio as of September 1, 2020) is insufficient to adequately cover non-performing loans according to our broad definition. We project a moderate increase in provisions to about 15% in the next two years", -  the Agency suggested.

At the same time, S&P predicts a 2-3% increase in retail loan portfolio since the implementation of government support programs and continued low level of public debt have a positive impact on population's demand for loans. The ratio of household/GDP debt in Kazakhstan was 9.3% which is still lower than indicators of comparable countries. At the same time, Agency expects that the ratio of domestic credits to the private sector to GDP will remain at the level of 22-23% of GDP by the end of 2022 which is about the same level as at the end of 2019 (22%).

The share of mortgage lending will increase to about 5% of GDP in the next two years due to renewed demand for consumer and mortgage loans.

"We consider Kazakhstan to be a state that is ready to support the banking system. In our opinion, government of the country has ability and willingness to support banks" - the Agency believes. Analysts recalled that the government has already provided support to banks with "high" and "moderate" systemic importance in previous years.